Corruption in China: Forms, Drivers, and Economic Coexistence

Key Insight

Corruption has been endemic throughout China's reform era, evolving in its manifestations. In the 1980s, a major source was the two-track price system, where officials exploited price differentials between low planned prices and higher free-market rates, contributing to the Tiananmen protests of 1989. The 1990s saw widespread smuggling, profitable due to high tariffs (e.g., 32 percent weighted average tariff in 1992, 100 percent for automobiles) and non-tariff barriers, generating billions of dollars annually and causing significant capital flight, estimated at over $80 billion (nearly 8 percent of GDP) in 1998. In the 2000s, the urban construction boom created opportunities for rake-offs from land deals and infrastructure projects, with local governments extracting bribes for prime plots and officials receiving kickbacks, escalating dramatically during the 2009-2010 economic stimulus.

Beyond these major phases, corruption permeated other areas, including payoffs for business licenses and investment project approvals, and the sale of official appointments and promotions. The elite also profited from initial public offerings (IPOs) by acquiring cheap or free shares from companies ahead of listing, securing huge tax-free profits. Corruption extended to the highest levels, exemplified by Zhou Yongkang, whose family and associates had $14.5 billion in assets confiscated, ranking him among China's richest. Similar extensive wealth has been documented for families of former Prime Minister Wen Jiabao (US$3 billion) and current President Xi Jinping (US$55 million in Hong Kong property, US$2 billion investments). Despite this magnitude and ubiquity, China sustained a 10 percent economic growth rate for three decades without systemic collapse.

This coexistence was initially possible for three reasons. First, early corruption was often a side effect of beneficial economic reforms, where the overall gains outweighed the costs of graft. Practices like arbitraging dual-track prices or smuggling effectively reduced non-economic import tariffs, responding to market signals until reforms eliminated the underlying distortions. Second, allowing officials some degree of corruption, or 'skin in the game,' incentivized their support for market reforms. Third, the Communist Party maintained continuous, albeit constrained, anticorruption efforts. Prosecutions for 'economic crime' cases, surging in the 1980s and consistently above 30000 annually until 2008, along with harsh penalties including ten-year prison terms or death sentences (700 in the decade to 2008), established boundaries, ensuring corruption remained a 'successful parasite' that did not kill its host economy. After 2005, corruption became more predatory and less a side effect of beneficial reform, prompting Xi Jinping's unprecedented anticorruption campaign launched in 2012-2013, which disciplined over 75000 officials by the end of 2014, targeting high and low-level offenders ('tigers and flies') as part of a broader governance strategy to reform governing structures.