WASHINGTON, Oct 9—Failure to contain endemic corruption among Chinese officials poses one of the most serious threats to the nation’s future economic and political stability, says a new report from the Carnegie Endowment. Minxin Pei, an expert on economic reform and governance in China, argues that corruption not only fuels social unrest and contributes to the rise in socioeconomic inequality, but holds major implications beyond its borders for foreign investment, international law, and environmental protection.

In Corruption Threatens China’s Future, Pei paints a sobering picture of corruption in China, where roughly 10 percent of government spending, contracts, and transactions is estimated to be used as kickbacks and bribes, or simply stolen. He examines the root causes for China’s rampant corruption—partial economic reforms, lax enforcement efforts, and reluctance by the Communist Party to adopt political reforms—and the ensuing economic losses and jeopardized financial stability.

Key Findings:

• Though the Chinese government has more than 1,200 laws, rules, and directives against corruption, implementation is spotty and ineffective. The odds of a corrupt official going to jail are less than 3 percent, making corruption a high-return, low-risk activity. Even low-level officials have the opportunity to amass an illicit fortune of tens of millions of yuan.
• The amount of money stolen through corruption scandals has risen exponentially since the 1980s. Corruption in China is concentrated in sectors with extensive state involvement, such as infrastructure projects, real estate, government procurement, and financial services. The absence of competitive political process and free press make these high-risk sectors susceptible to fraud, theft, kickbacks, and bribery. The direct costs of corruption could be as much as $86 billion each year.
• The indirect costs of corruption (efficiency losses; waste; and damage to the environment, public health, education, credibility and morale) are incalculable. Corruption both undermines social stability (sparking tens of thousands of protests each year), and contributes to China’s environmental degradation, deterioration of social services, and the rising cost of health care, housing, and education.
• China’s corruption also harms Western economic interests, particularly foreign investors who risk environmental, human rights, and financial liabilities, and must compete against rivals who engage in illegal practices to win business in China.
• The U.S. government should devote resources to tracking reported cases of corruption in China, increase legal cooperation with China (to prevent illegal immigration by corrupt officials and money laundering), and insist on reforms to China’s law-enforcement practices and legal procedures before tracking Chinese fugitives in the United States and recovering assets they have looted.

"Corruption has not yet derailed China’s economic rise, sparked a social revolution, or deterred Western investors. But it would be foolish to conclude that the Chinese system has an infinite capacity to absorb the mounting costs of corruption,” writes Pei. “Eventually, growth will falter.”

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Notes:

• To read this report, go to www.carnegieendowment.org/programs/china  
  Direct link to the PDF: www.carnegieendowment.org/files/pb55_pei_china_corruption_final.pdf  
• Minxin Pei is director of the China Program at the Carnegie Endowment, where his research focuses on democratization in developing countries, economic reform and governance in China, and U.S.-China relations. He is the author of From Reform to Revolution: The Demise of Communism in China and the Soviet Union (Harvard University Press, 1994) and China’s Trapped Transition: The Limits of Developmental Autocracy (Harvard University Press, 2006).
• The Carnegie China Program provides policy makers in China and the United States with a better understanding of the dynamics in China and in U.S.-China relations. In late 2005, the Carnegie Endowment finalized an agreement with the China Reform Forum, a leading Chinese think tank, to set up a joint Beijing Program on globalization and international relations in China.  The mission of the joint program is to advance research in the impact of globalization on foreign policy making and promote scholarly exchange between the United States and China.
• The Carnegie China Program has a number of online resources to communicate its research findings and policy insights to both governmental and non-governmental audiences in China, the United States, and around the globe. ChinaNet, our Chinese-language website, features international affairs content produced in Chinese and translated from Carnegie publications, including Foreign Policy magazine. The material includes articles on economics, Chinese social and political change, Chinese foreign policy, and U.S.-China relations, often not available from any other source in China. The China Program also produces Carnegie China Insight Monthly, a Chinese-language e-newsletter. The Hong Kong Journal, an online quarterly edited by Robert Keatley, former editor of the Asian Wall Street Journal, covers political, economic, and social issues on Hong Kong and its relations with mainland China, the United States, and other governments and international organizations.
• Reframing China Policy: The Carnegie Debates: The series aims to candidly discuss the most pressing issues in U.S.-China relations and to provide the most authoritative information possible to those on Capitol Hill who are shaping U.S. foreign policy. Since its inception in Fall 2006, the China Program has hosted six debates on the most critical—and controversial—issues involving China's economic, political-social, and military evolution and their policy implications.