Pursuing Graft Cases at Higher Levels, Chinese Leader Risks Unsettling Elites; “Xi Jinping must do something to show that he has command over those interests — that they are not independent kingdoms. Otherwise, no one will follow him”

September 25, 2013

Pursuing Graft Cases at Higher Levels, Chinese Leader Risks Unsettling Elites


HONG KONG — Shortly before his retirement late last year, Zhou Yongkang, the longtime chief of China’s domestic security apparatus, visited an office of the state oil company where he had started his ascent in the Communist Party hierarchy. He spoke of his undimmed devotion to the company, China National Petroleum Corporation, and to his fellow oilmen. “Oil is a word that stays in an oilman’s heart for his whole life,” Mr. Zhou said in his valedictory. A year later, senior officials associated with the oil conglomerate, including longtime allies of Mr. Zhou’s, are enmeshed in spreading corruption inquiries, presenting China’s new leader, Xi Jinping, with one of his biggest tests so far: How far and high is he willing to go to clean up China’s political elite?Since his appointment as top leader last year, Mr. Xi has promoted himself as a firm opponent of “flies and tigers”: low- and high-ranking officials engaged in graft and bribetaking. On Sunday, he scored one victory when a court sentenced Bo Xilai, a former Politburo member, to life in prison after declaring him guilty of accepting bribes, embezzling state money and abusing his power.

But Mr. Xi must now decide how much further he is willing to pursue other high-level corruption investigations that could either strengthen his authority or unleash risky instabilities within the political elite.

Mr. Xi is eager to assert authority over the domestic security agencies and the military, said Ding Xueliang, a professor at the Hong Kong University of Science and Technology who has studied corruption in China.

Mr. Zhou, who retired as a member of the Politburo Standing Committee, a rank that is widely assumed to make him effectively untouchable, will be an important test of Mr. Xi’s intentions and authority.

“What’s going on can be called shaking the mountain to scare the tiger,” said Professor Ding, citing a Chinese expression meaning a show of strength to warn others.

“It’s also about Xi consolidating control over the key parts of the system,” Professor Ding said. “It says to Zhou Yongkang, ‘We are in the process of collecting all the evidence of people close to you, and if you don’t keep yourself disciplined, we can do more.’ Others will also understand that warning.”

In late August, four senior managers of the oil company, known by its initials C.N.P.C., and its stock market-listed arm, PetroChina, were dismissed in a party investigation into allegations of disciplinary violations, a term that usually means corruption. Days later, a former chairman of C.N.P.C., Jiang Jiemin, was publicly accused of the same charges and then dismissed from his job in charge of the government agency that administers state-owned companies.

Mr. Jiang and several other oil executives under investigation had worked under Mr. Zhou when he was a rising official at C.N.P.C. and its predecessor, a state organization. And even before the oil scandal broke into the open, a corruption investigation in Sichuan Province, where Mr. Zhou served as party chief, had taken down officials who were close to him.

But this is potentially treacherous terrain for China’s new leadership, observers said. From 2007 until last year, Mr. Zhou, 70, was head of the party’s Legal and Political Affairs Committee, which oversees the police, courts, state security and other powerful agencies for domestic law and order. As a member of the Standing Committee, he was part of the innermost council of party power.

With that background, Mr. Zhou might be able to summon support from allies and party elders, and any formal charges against him could tear up norms that for decades have insulated top leaders and their families from scrutiny and shored up elite stability. Mr. Xi and his colleagues will probably refrain from publicly pursuing or punishing Mr. Zhou, said most observers.

“They want to have a cleaner playground,” Professor Ding said of Mr. Xi and his colleagues. “But I don’t think the decision has been made to openly punish Zhou Yongkang. If they come to that decision, then the rules of the game change dramatically.”

But as the trial of Mr. Bo showed, corruption allegations that date back decades can be exhumed to make a case against an official. And there are signs that Mr. Zhou’s past is also exposed to official scrutiny.

In July 2012, C.N.P.C. held a leaders’ meeting in Chengdu, the capital of Sichuan Province in southwest China. Mr. Jiang, who was then chairman and party secretary of the company, spoke, as did Li Chuncheng, who was then deputy party secretary of the province. A deputy head of the provincial legislature, Guo Yongxiang, was among the dozens of officials who attended the meeting, according to reports on the company’s Web site.

Now all three men are under investigation by the party’s chief anticorruption agency, the Central Commission for Discipline Inspection, an ominous development for Mr. Zhou, who has career ties with all of them. In December, the Central Commission for Discipline Inspection publicly targeted Mr. Li, who had risen quickly in Sichuan while Mr. Zhou was party chief from 1999 to 2002. Probably even more unnerving for Mr. Zhou, his former secretary, Mr. Guo, was detained in June.

“The fact that it’s oil and Sichuan, two places where Zhou’s been for parts of his career, certainly suggests that there’s something involving Zhou here,” said Erica S. Downs, a researcher at the Brookings Institution in Washington who studies Chinese energy policy and politics. “You could probably make the case that Jiang Jiemin is the closest to Zhou Yongkang.”

The government has not publicly named Mr. Zhou as the target of any investigation, but investigators have focused on Mr. Zhou’s son, Zhou Bin, a businessman, two sources familiar with his movements have said, speaking on the condition of anonymity to avoid recriminations. In China, criminal investigations against senior officials are usually opened only after party investigators complete their inquiries and leaders decide whether to proceed to the courts. Neither Mr. Zhou nor his son has publicly responded to the reports and rumors about them.

Even if Mr. Zhou is spared public punishment or censure, Mr. Xi has sent a warning to other officials and powerful arms of the party-state, analysts said. For critics, C.N.P.C. embodies the quasi-monopolistic dominance of state-owned conglomerates and their access to credit and political patronage that have ensured their growth, to the cost of potential competitors and the long-term health of the Chinese economy.

“It’s not so much Zhou personally; it’s breaking down his networks, and that patronage system that had allowed the oil companies to become extremely powerful,” said Michal Meidan, a senior analyst at Eurasia Group in London who follows Chinese politics and energy companies. “The message has been sent that they no longer have unlimited power.”

The investigation is also likely to send that message to the public security apparatus, where Mr. Zhou amassed a growing budget and influence. Critics have said that Mr. Zhou used that influence to promote and protect Mr. Bo, the politician tried last month for corruption, embezzlement and abuse of power.

A separate investigation into military corruption appears intended to send a similar warning there. Gu Junshan, a general who was the deputy director of the military’s General Logistics Department, has been investigated on corruption charges since his removal last year. Chinese news reports, as well as party insiders, have said that General Gu has been accused of amassing a fortune through illegal sales of military land and posts.

For decades, top party leaders have shied away from targeting their peers on corruption charges, even though subordinates may be punished.

That informal arrangement has constrained elite rivalry, and if Mr. Xi does away with it, he would alarm retired leaders, including the former president and party chief Jiang Zemin, said Zheng Yongnian, the director of the East Asian Institute at National University of Singapore.

“Xi Jinping must do something to show that he has command over those interests — that they are not independent kingdoms. Otherwise, no one will follow him,” Mr. Zheng said. “Of course, how far he can go is another matter.”

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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