China's President Has Only Begun To Take Down The Tigers And Swat The Flies In His Historic Corruption Crackdown

China has investigated over 25,000 people for corruption in the first six months of 2014. Probes into major cases were up 14% year-over-year.

182,000 officials were punished by discipline inspection agencies in 2013, up 13.3% year-over-year.

Remember, Chinese president Xi Jinping came to power on the back of a very ominous message from his predecessor. In late 2012, outgoing president Hu Jintao warned that corruption could prove "fatal" to the Chinese Communist party, and even "cause the collapse of the party and the fall of the state."

Xi, who has been described as "redder than red" took that message to heart. Under his watchful eye, China's anti-graft campaign has gathered steam.

At first we saw an austerity campaign that warned against lavish gift giving and wasteful consumption. Soon that spread to the takedown of corrupt officials in the Chinese communist party, though some would argue that the seeds of this were sown in the downfall of former Chongqing leader Bo Xilai.

Now, government officials have caps on daily spending when traveling around China. The Chinese military has been banned from buying foreign-made vehicles. The State Council is widening its probe into the use of public funds for travel, gifts etc among military officials. And officials have become nervous about being caught playing golf.

Talking about the scope of this campaign in 2013, Xi said,"we must uphold the fighting of tigers and flies at the same time, resolutely investigating law-breaking cases of leading officials and also earnestly resolving the unhealthy tendencies and corruption problems which happen all around people."

The tigers and flies

Zhou Zhenhong, former member of the Standing Committee of the Guangdong Provincial Committee and former head of the United Front Work Department, was sentenced to death with a two-year reprieve. Zhou, a "tiger" was found guilty of accepting $4 million in bribes and failing to account for about $6 million in assets. Zhou first came under the scanner in 2012. 

Last year, Liu Tienan, former deputy head of the National Development and Reform Commission (NDRC) was expelled from the Communist Party after being accused of corruption. Liu was one of the first tigers to be caught in the anti-graft sweep across China, based on accusations made online. 

Liu Zhijun, former railways minister was given a suspended death sentence for corruption and abuse of power. Su Rong, former party chief for Gansu, Qinghai and Jiangxi Province before moving to the CPPCC, and a "tiger" was under suspicion for violating party rules and state law.

The latest to be ensnared in the crackdown is Rui Chenggang, a host on China Central Television (CCTV) and in the bigger scheme of things a fly. Caixin Online reported that he was detained shortly before his program aired on July 11. Li Yong at CCTV2 was also detained. The probe has also extended to other television executives like Guo Zhenxi, director of CCTV2.

And now the campaign is shifting gears to focus on “naked officials,” those with immediate families that live abroad. Over a thousand naked officials were found in Guangdong province in June, with 200 of those officials asking their families to return home and 866 agreeing to demotions.

Xi's Consolidation Of Power

But there are two names that truly stand out. First, is Zhou Yongkang, a former Politburo Standing Committee member, is said be under investigation and so are three officials linked to him, Li Dongsheng, Jiang Jiemin, and Wang Yongchun.

Of course for Xi the one happy coincidence to this corruption purge, is that it helps him knock off some of his rivals. "Power consolidation is of course very important and we should consider the ongoing investigation into Zhou Yongkang and his allies at least in part in that light,” Bill Bishop author of Sinocism told Business Insider. 

"There is little doubt these people were engaged in remarkable amounts of corruption, and there are all sorts of unproven rumors about plots and deals among this group in the runup up to the 2012 18th Party Congress, but taking down this network has also allowed Xi to gain control over the security services, and much faster than most observers expected."

"The other vital source of hard power is of course the military," explained Bishop, enter:  Xu Caihou, who once held one of the highest positions in the People’s Liberation Army (PLA) and was a member of the Politburo. Xu was expelled from the Party and handed over to prosecutors for accepting bribes. This of course is a further sign of Xi consolidating power over the PLA.

Jim Chanos sees the corruption drive as a much more serious effort to "cleanse the party." Speaking on  Bloomberg TV's Charlie Rose Show he said, "If you look at the people's daily overnight announcements — I mean, there is four or five headshots put up on Twitter and on their website, of people who have been taken away every night. I mean it's almost as if you're seeing a Soviet-style 1930s purge through a social media."

Some argue that this makes Xi more a Maoist, than a Dengist, with reference to Deng Xiaoping, China's paramount leader from 1978 until his death in 1997. But some argue he's neither.

“I see Xi Jinping more as a Machiavellian than a Maoist,” Arthur Dong, professor of strategy and economics at Georgetown University told Business Insider. “The ends that Xi Jinping and his reform minded coalition wish to pursue relate to the long-term viability of the Communist Party.”

"Institutional weakness as a result of endemic corruption on the part of government administrators has been a recurring feature of China’s past and one of the driving forces that led to the end of the dynastic cycle.  President Xi knows that for the Party to survive it must maintain its legitimacy," he explained. "Invariably, some of the accused represent views that come to differ with Xi’s. Their removal also presents the opportunity to remove a political rival. It is a messy game that Xi has so far been very adept at playing."

"It is a mistake however, to conclude that it is just about reshuffling officials so Xi can put his people in place," Bill Bishop author of Sinocism told Business Insider in an email interview. 

"I believe that Xi is serious about improving governance and cleaning up at least the more egregious corruption in both the Party-state and the military," Bishop said. "I think the anti-corruption efforts are also clearly about reining in and in some cases removing special interests that are resisting the very ambitious reform plans passed at the Third Plenum of the 18th Party Congress in November 2013."

The Economic Impact

There is however a snag to the anti-graft campaign. Unlike other countries, in the short-run, cracking down on corruption actually hurts growth in China, according to Alastair Chan at Moody’s. 

The austerity campaign that we saw in real force in 2013, deterred conspicuous consumption and lavish gift giving. At the time, it hurt sales of luxury goods, catering at high-end restaurants, and wasteful construction of government buildings. Top-end restaurant sales were down 35% YoY in 2013.

Now Bank of America’s Ting Lu believes that corruption is going to start impacting fixed asset investment (FAI). “Even for the honest officials, the escalated anti-graft campaign is making them think twice before making investment decisions,” wrote Ting. 

“The officials are increasingly cautious as they don’t want to be the next target of the campaign for the actions they have taken. Many feel the safest way during the heightened crackdown is to do nothing. This is part of the reason that Premier Li has repeatedly called for more action at local levels since May.”

Ting points to "the abnormally high growth in bank deposits of governments and quasi-government agencies (up 28.3% and 23.6% yoy in February 2014 respectively),"  the slowdown in retail sales and FAI growth as factors weighing on the Chinese economy.

Of course, Xi is aware that he can't terminate the campaign at this point. In fact economists expect it to continue for another two or three years. Moving forward Beijing is left with a tough choice between the social benefits of lower corruption or economic growth.

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