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China doubles down on anti-corruption drive and implications

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China has followed up on its 2013 initiatives to reform the country’s governance by doubling down on its anti-corruption campaign this year, which has focused on cracking down on the law enforcement agency. If implemented properly, this will help boost the system’s transparency and governance and, thus provide a long-term boost to Chinese asset prices.

 

Despite the challenging economic and geopolitical environment in recent years, China has kept pushing on its structural reforms with most market players not noticing it. President Xi Jinping has doubled down on his anti-corruption campaign this year by ousting three senior (vice-ministerial ranking) police officials. This is the highest number in a single year since Xi’s anti-corruption campaign launched in 2012. Local police forces across China (including ex-police officers) are under tight scrutiny as Beijing moves to battle against gangs and crime syndicates.

In mid-August 2020, the Central Commission for Discipline Inspection (CCDI) ousted Shanghai’s vice mayor and police chief, Gong Dao’an, on corruption and obstruction of justice charges. This followed similar moves in April and June this year when the CCDI also removed vice minister of public security Sun Lijun and Chongqing vice mayor and police chief Deng Huilin.

The removal of three senior police officials even before this year is out marks a new record of Xi’s anti-corruption drive. Between 2012 and 2019, only four senior police officials were investigated and dismissed, including two vice ministers of public security and two police chiefs in Tianjin and Chongqing.

Far-reaching implications

This crackdown on the police force is a follow-up on one of the key reform initiatives highlighted in the structural reform blueprint, the “Decision”, issued after the Third plenum in mid-November 20131. That initiative seek to strengthen judicial independence by putting the local courts directly under the central government’s supervision. The purpose is to separate law from administrative jurisdictions at the local government levels so as to free the local courts from local government control and, thereby, to destroy a large part of the rent-seeking/corruption mechanism.

The crackdown would affect the prosecutorial and judiciary branches in the coming years as the rectification campaign of the legal system will be rolled out gradually nationwide. In business disputes, with judges holding exclusive power to assign agencies for asset appraisal and execution oversight, disputing parties have a strong incentive to bribe judges to make favourable gains.

But with law enforcement now under scrutiny, this reform could help improve the transparency of the judicial environment for businesses in China, if it is implemented properly, and would go a long way to address the systemic governance problem of investing in Chinese assets.

 

Chi Lo, Senior Economist for Greater China

 

 

 

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

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