Don't expect less corruption in China after Bo Xilai trial

August 27, 2013: 10:35 AM ET

The trial of Bo Xilai reflects a dark reality in China, where businesspeople have to rely heavily on government officials to succeed.

By Wenguang Huang

Bo Xilai

Bo Xilai

FORTUNE -- Known as the "secret wallet" for several senior Communist leaders, former billionaire businessman Xu Ming used to brag about his special access and protection. However, after the murder of British businessman Neil Heywood led to the spectacular fall of Bo Xilai, a princeling and former party chief of China's mega city of Chongqing, Xu disappeared in April 2012. A close friend of the Bo family, Xu was allegedly under police custody but nobody knew where.

During last week's trial of Bo, who is facing charges of bribery, embezzlement, and misuse of authorities, the 42-year-old Xu reemerged on the witness stand. He claimed to have bribed the Bo family with $3.3 million in cash and gifts. His testimonies, part of which have been broadcast by China's version of Twitter, cast light on the close and yet precarious relations between Chinese government officials and businessmen, testifying to a popular saying: Behind every successful businessman in China, there is a high-level government official.

Xu is not alone. In June, Liu Zhijun, the former Minister of Railways, was given a suspended death sentence on corruption related charges. His case involved securing favors for 11 business people over the course of 25 years in project bidding, promotions, and allocation of rail transport quotas. In particular, Liu helped Ding Yuxin, a farmer-turned-business magnate, and her relatives obtain transport quotas, stocks in railway-related companies and winning project bids. In her court testimony, Ding admitted paying the former minister millions of dollars in bribes and spent nearly $7 million lobbying a local court on behalf of Liu to reduce sentencing for a friend.

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Similarly, Huang Guangyu, who had traveled to Beijing from his rural village in Guangdong province with $645 in his pocket, started the Gome Electrical Appliances Holdings in 1990. In a few years, his company became China's second-largest home appliance retailer. In 2008, when he was 41, a Beijing court sentenced Huang to fourteen years in prison for illegal business dealings, insider trading, and corporate bribery, charging that Huang directly bribed or instigated others to bribe five government officials with $725,000 in cash and property in exchange for corporate benefits. Huang's sentencing led to the downfall of a group of senior officials at the Ministry of Public Security, the State Administration, and the Beijing municipal public security bureau.

These cases reflect a dark reality in China, where businesspeople have to rely heavily on government officials to succeed. It is not uncommon for a millionaire to bow to the needs of a tiny government agency director, who might control the local policies and resources, and could destroy a person's business plan or make his wealth evaporate overnight.

During a recent visit to central China, I learned that the owner of a local supermarket chain had offended a senior official at the municipal People's Congress by refusing to donate money to one of the official's pet projects. A year later, the businessman was notified that the building that housed his flagship store would be demolished to make way for a new office facility. The notice came right after he had renewed a 10-year lease and invested heavily in the store. Even though the city government compensated him for part of his costs, the loss of the prime location effectively destroyed his business.

The attraction seems to be mutual. Officials are increasingly dependent on businesspeople to underwrite their own family expenses. Officials realize that unless they can find a way to convert their power into cash, they will end up with nothing after they retire.

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In the 1980s and 1990s, bribes from businesses came in the form of a red envelope with several hundred yuan in cash or a gift card or unlimited access to a certain bank account. That has evolved into diverse methods of bribery, where a wealthy businessperson is treated like an official's private treasurer or underground office manager. The businessperson quietly pays for big purchases made by the official's family members.

In some cases, an official or his or her family members are appointed silent investors in an enterprise. The deal is a win-win situation -- the official obtains a certain percentage of the company for nothing and without the knowledge of the public or the party, and the businessperson gets the necessary political protection or a certain government contract.

In the 1980s, the Communist Party forbade children of senior leaders to engage in business. But now it is rare to find officials whose children are not using their parents' connections to do business. Many foreign firms have hired princelings to grease the wheels. U.S. officials are investigating J.P. Morgan (JPM) over whether or not its hiring of certain children of Chinese officials amounts to bribery.

On the opposite side, a businessperson can become an official's secret lobbyist, bribing senior leaders on behalf of the official for promotions and paying the media to write positive stories.

As a consequence, corruption permeates every level of the party and the government. Sometimes, if an official attempts to stay clean, he or she would be considered a rule-breaker who could soon be purged. With their shared interests, businesspeople and government officials are tied together in one boat. If one side gets into trouble, the other one will go down with it.

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In the much-watched trial of Bo Xilai, former billionaire Xu's testimony played a big role. When the hoopla is over, the legendary entrepreneur who once headlined many business and financial publications will face his own trial, which, analysts predict could get him 10 to 15 years in jail.

Xu's situation illustrates a sad fact in China -- once a businessperson loses the protection of power, he can be crushed like an ant. That was also the very reason Xu Ming clung so closely to Bo Xilai, but unfortunately, Xu picked the wrong power seat.

Wenguang Huang is co-author of A Death in the Lucky Holiday Hotel: Murder, Money, and an Epic Power Struggle in China.

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