May 28, 2014 04:42 PM

Sustained Anti-Corruption Campaign Is Positive Signal

After government agencies, state-owned enterprises (SOEs) have become the second main battleground for China's crackdown on corruption. In September, a series of reports signaling high-level corruption at PetroChina and its parent company, China National Petroleum Corp. (CNPC), culminated in the detention of former CNPC chairman and then director of the State-owned Assets Supervision and Administration Commission, Jiang Jiemin.

In Hong Kong, another state-owned conglomerate, China Resources Holdings, has also come under scrutiny. Its chairman, Song Lin, was placed under investigation last month. Since then, three others have been detained, most recently Wang Shuaiting, a former executive at the company and current chairman of China Travel Services (Holdings) Hong Kong.

We expect more such shocking revelations.

The sustained crackdown signals the authorities' determination to cut the rot. Clearly, a minority of senior executives at state-owned giants have no qualms exploiting their power and privilege for their own gain and the benefit of those with whom they collude.

Investigators cannot afford to relax: every case of wrongdoing uncovered must be prosecuted. Meanwhile, the country must rethink the structure of its SOEs – a perverse state-market hybrid – that has allowed corruption to flourish. Thus, we could not agree more with Wang Qishan, chief of the Central Discipline Inspection Commission, when he says the corruption fight at SOEs must go hand in hand with their reform.

The cozy relationship between government and business in an SOE has become a mask for corrupt behavior. The practice of "administrative monopoly," by which monopolistic rights are granted to a company by government order, is also to blame. The root of the problem lies in the unchecked power of the state to allocate resources.

Despite more than 20 years of reform that tried to turn lumbering state firms into modern companies, state-owned giants today remain more a bureaucracy than a model of market efficiency and transparency.

Even PetroChina, which is listed on the New York, Hong Kong and Shanghai stock exchanges, and Hong Kong-based China Resources are at heart more government department than international company. Their most senior executives are not appointed by shareholders or the board of directors, but by the government. Company managers care more about protecting their power than being accountable to the market. It is no surprise that corruption has flourished. This is the result of systemic failure, not just individual fault.

The government must continue to uncover the sleaze in state-owned companies and name the culprits. Some officials have argued against action, claiming that reports of corruption would hurt the image of state-owned firms. Some even claim that while state and party organs must behave above board, we should be more lax with SOEs since they promote growth, and exposing corruption is bad for growth.

This is nonsense. Corruption has done immeasurable damage to China's market development. Prosperity cannot be built on a corrupt foundation. No area or person should be off-limits to graft busters.

Further, the government must seize the opportunity to push for reform to fix the root problems of power abuse and resource monopoly. This means decentralizing the power of management in a way that allows for checks and balances, and subjecting state-owned firms to open and fair market competition. Doing so will reduce the avenues for rent-seeking and the transfer of benefits.

The third plenum of the party's 18th Central Committee in November called for state-owned companies to be professionally run, and to institute a healthy system of remuneration and incentives, as well as improve accountability for all investment decisions. This means hiring professional managers rather than appointing bureaucrats. This will help to build a "firewall" between business and government to prevent collusion.

Timely information disclosure is also crucial. According to recent guidelines on government information disclosure, state-owned companies must improve publication of their financial information. In fact, given that they are truly public entities, they should in fact be held to more stringent disclosure standards than listed companies.

In the long run, the fight against corruption must be part of wider reforms that must also improve property rights.

This is no overnight fight. The government must persevere by never giving in to the impulse of a cover-up. Only by deepening reforms while building up the rule of law can China truly beat corruption.

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