China’s Shaken Trust; An earthquake shows the decline of confidence in the Communist Party.

Updated April 23, 2013, 5:10 p.m. ET

China’s Shaken Trust

An earthquake shows the decline of confidence in the Communist Party.

Saturday’s earthquake in Sichuan brought back traumatic memories of the much larger quake only 40 miles away that killed almost 90,000 people in 2008. So far the official death toll this time is around 200, but the government has again mobilized a massive rescue and relief effort.

A notable difference is the public response, which has revealed profound mistrust of the government. Donations to state-run charities are down and cynicism reigns online about official statements and appeals. The country has shifted under the feet of the Communist Party since 2008, which means new leaders Xi Jinping and Li Keqiangare under pressure to find ways to restore trust.

After the first Sichuan quake, there was an immediate outpouring of donations in response to the state-run media’s appeals. Yet early praise for government efforts gave way to anger as the quake exposed government corruption and incompetence. Poorly built schools collapsed, killing more than 5,000 schoolchildren, while government offices and their occupants survived. Large sums of relief money disappeared. The reconstruction enriched officials while survivors continued to suffer.

The Party’s reputation has deteriorated even further since 2009, when the advent of microblogging created a new outlet for exchanging information and opinions. A watershed moment came after the 2011 crash of a high-speed train in Wenzhou, when news flashed around the country that a two-year-old girl had been found alive in the wreckage after rescue operations were called off. Former Railways Minister Liu Zhijun is awaiting trial for taking $250 million in bribes, which given the notorious corruption in the high-speed rail program is probably a fraction of his total take.Then there was the 2011 scandal when a young woman who claimed to be a manager with the government-controlled Red Cross Society of China flaunted her Maserati sports car on an Internet posting. That led to a shortage of blood donations in Beijing, and now charities raising money often emphasize that they have no ties to the Red Cross, for fear of losing donations.

Noxious water and air pollution as well as food safety scandals have further eroded trust in the government’s ability to regulate state and private enterprises and protect public health. Five years after a scandal involving adulterated milk powder, Chinese parents continue to buy baby formula from abroad, creating a global shortage. Anger against polluters has become one of the major sources of mass protests, but the government response is often to detain the protest organizers.

But it is lies and cover-ups that arguably have done the most damage to the Party’s image. The apparent coincidence of thousands of dead pigs floating in Shanghai’s rivers last month and the emergence of a new strain of avian influenza has created rampant speculation that a link between the two is being concealed. Given the 2003 cover-up of SARS, this is no surprise. Even China’s Premier Li Keqiang has admitted that he doesn’t trust the economic statistics that are compiled in Beijing.

Instead of increasing transparency and accountability, the Party has responded to the collapse of public trust with more propaganda. One of Mr. Xi’s first acts as Party General Secretary was to initiate a crackdown on corruption. Such campaigns come and go with little effect, since they often target officials who have fallen out of Party favor. The most powerful are able to avoid scrutiny because the Party controls the police and judiciary. Late last month four activists who called for disclosure of officials’ assets were arrested.

Some Chinese leaders seem to realize that this approach exacerbates the problem. Politburo member and anticorruption czar Wang Qishan last year advised his colleagues to read Alexis de Tocqueville’s 1856 book “The Old Regime and the Revolution” about how the French monarchy lost its legitimacy as more prosperous citizens began to resent the ruling elite’s monopoly on power. The book has since become a bestseller in China and a topic of public debate.

China’s three decades of economic growth, accompanied by almost no political reform, has created social conditions similar to the ones Tocqueville described in pre-1789 France. The public response to Saturday’s earthquake is one more reminder that the Chinese people’s desire for change is building like pressure along a fault line.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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