SVA Corruption Report

Treading carefully in China Foreign companies face risks in anti-corruption campaign

BEIJING -- The anti-corruption campaign of Chinese President Xi Jinping shows no sign of slowing three years after its launch.

Many officials know they are vulnerable because of the simple fact that many are corrupt.

For the past 10 days, the most powerful people in China have been away from their workplaces for the annual political show known as the National People's Congress. Not much goes off script, because the prime minister's report, the national budget and various laws have been prepared and are not up for alterations. At this year's session, which closed on Sunday, among the most commonly heard utterances were, "Will I be able to return home after the session?" and "Will I be back here again next year?"

During the sessions, top prosecutor Cao Jianming revealed that the number of civil servants investigated during the past year was a staggering 55,101.

But the anti-corruption campaign does not only affect Chinese officials, as noted in report to be released Monday by Hong Kong-based risk consulting company Steve Vickers and Associates. "It presents real risks to foreign businesses, as it is rooting out longstanding patronage networks, altering accepted working practices and dampening sentiment in key markets," the report warns. "Companies suffer when they lose political protection."

The report cites recent examples including that of Kaisa Group, a previously well-regarded developer which has scrambled for survival apparently because of links between its top officials and Zhou Yongkang, the disgraced former security chief now facing trial for graft; after local officials blocked the sale of units in several of its residential projects, the company was late on a bond payment last month and is now trying to restructure billions of dollars in debt owed to both offshore and domestic bondholders.

Any accusations of bribery or wrongdoing in China could potentially prompt mirror investigations under the U.S. Foreign Corrupt Practices Act or the U.K. Bribery Act. Foreign investors, therefore, need to understand and reduce their exposure.

"The key first step is to identify how exposed any current business partner or corporate executive might be," the firm advises. "Patronage networks can stretch far, though, so the risks can be wider than expected."

The report identifies business partners from the provinces of Hainan, Guangdong, Sichuan, Shanxi, Jiangxi, Jiangsu and Shandong and the cities of Shanghai and Chongqing as most at risk, because of links to disgraced senior politicians such as Zhou, Bo Xilai and Ling Jihua. Energy, property, education, finance, healthcare, pharmaceuticals, resources and telecommunication sectors are identified as sectors "most at risk", with China Unicom among the companies the report suggest could "face investigations and negative outcomes."

The second key step is to identify upcoming risks, the report advises. "Rumors suggest that the family of former premier Li Peng is exposed, affecting energy companies under [relatives'] sway." Another risk is emerging in Jiangsu Province, where both the party secretary and mayor of Nanjing, the provincial capital, have been investigated. "These investigations hint at a target in Li Yuanchao, Politburo member and ally of Hu Jintao," another former president. Li was party secretary of Jiangsu between 2002 and 2007.

On the other hand, the report notes that officials from Zhejiang and Fujian provinces appear to be on the rise. The report also cites Anbang Insurance as another seeming "victor" from the anticorruption campaign, with influential backers and several recent acquisitions under its belt.

For foreign companies, any risk management measures taken as a response to an investigation may be too late to protect the company's interests in China and perhaps its global brand. On the other hand, the report says, "Any business that can identify winners early could forge links providing a real competitive advantage."

Be careful where you place your bets.