Why Chinese Corruption is a Direct Risk to the United States
US firms in which US pension funds and retail investors have put their savings have sunk over $228 billion into inward investment in China. This is in addition to investment in Chinese-based US-listed companies such as Alibaba’s $25 billion IPO on the New York Stock Exchange.
Alibaba has already proven controversial with US investors. Yahoo! famously sued it when it said Alibaba has unlawfully siphoned off its valuable Alipay subsidiary and was frustrated by, it alleges, the partisan behaviour of Chinese authorities as Yahoo! tried to seek justice.
The Yahoo! experience suggests that being a foreign investor is no guarantee of investor protection in China. The role of senior Communist Party (CP) officials in every aspect of Chinese life, trumps the rule of law every time, as incredible tales of Chinese expropriation start to emerge.
At face value, the Chinese government has a lot to celebrate in its much-vaunted anti-corruption campaign against Chinese officials both petty (‘flies,’ in CP parlance); very senior (‘tigers’); and, this summer, from the financial sector (‘crocodiles’). As Chinese state news agency, Xinhua, recently trumpeted: “authorities have registered about 1.16 million cases and taken disciplinary actions against 1.2 million people [including] 240 ‘tigers’ and 1.14 million ‘flies’…[&] 554,000 Party members.”
This record would seem to suggest that the Chinese government is both sincere and effective in tackling corruption; that no-one is immune to prosecution. The recent case of insurance tycoon Wu Xiaohui is typical, however, inasmuch his political ‘cover’ (CP connections) comes not from the current regime of President Xi Jinping, but from an older era (he is married to the granddaughter of Deng Xiaoping, China’s paramount leader in the 1980s). We’ve noticed this several times in the cases of exposed ‘tigers’: that their links to the ruling CP are not to today’s deep-state core.
Connection to the Party is everything in China, and this facilitates corruption and expropriation in a way that isn’t possible in Western democracies. To steal an entire company, in the United States, would require the individual buying-off of US state business registrars; banks; land registry; lawyers, the IRS and, ultimately, many judges. Hard to do and expensive. This diffusion of administrative power is the very essence of the ‘checks and balances’ that governs Rule of Law democracies and makes them good places in which to invest and do business. But, in China, the supremacy of the Party cuts across all these functions.
The inaugural case that our new Center for Justice in International Investment in China has chosen to campaign upon, to warn of the risks to foreign investment in China, is that of Boris Goh. Goh is a Singaporean citizen and real estate developer, of Chinese heritage, who was invited by the Singaporean government to join its 1993 tour of China to choose a site for Singapore’s inaugural investment in the People’s Republic. Singapore chose to invest in Suzhou (a deal that later became mired in controversy and the government of Singapore deeply out of pocket), but Boris Goh, however, was taken with another of the places he visited, Qingdao. He signed a contract to develop whole new areas for Qingdao City and Laoshan regions; investing nearly US$500 million in property developments between 1993 and 1994.
Early on Goh saw that the local Chinese government officials were keen to carve out side deals for themselves; as well as the arbitrary behaviour of the land registry, in manipulating certificates.
Goh’s experience is sobering: his decade-long investment – his entire Chinese business and property worth over $1.5 billion – was seized from him through a series of forgeries; complicit Chinese state banks (including one now trading its ADRs in New York); and corrupted judges. At least one CP-connected firm used these stolen assets as the launch pad for its Hong Kong Stock Exchange IPO.
But there was nothing Boris Goh could do about these court-sanctioned acts of theft and fraud. He was imprisoned, in a remote detention center, in solitary confinement, without access to legal counsel.
After over six months detention he was released, without trial or criminal conviction, on the very day, in 2004, that the last of his investments was court-sanctioned and stolen from him. The conspirators had no further need of his detention once they had completed their embezzlements.
Goh has been fighting for restitution ever since. His campaigning has seen two senior CP officials sentenced to prison for corruption (one sentenced to death: a sentence later commuted to ten years’ prison). He even won a partial US$120 million settlement on one of his investments, but the state counterparty later defaulted after paying just half the agreed amount. After a decade of trying to convince Beijing to give him justice, our new NGO will be launching a global legal campaign, alongside Boris Goh, in Singapore, July 31st, as he starts to sue the People’s Republic of China, and others, internationally.
Boris Goh’s case serves as clear warning to other direct investors in China, and it is far from being the only one. Danone, in 2009, threw in the towel on its trail-blazing Wahaha joint venture, which it reckoned lost over $100 million in ‘diverted’ income. Ultimately, it was Chinese courts that thwarted Danone’s access to justice, and Danone’s overseas court victories – unenforceable in China – were but Pyrrhic.
There has been a bewildering growth in the number of bilateral investment treaties (BITs), reflecting the surge of western, and notably US, investment in emerging markets. The number of BITs quadrupled in in the 1990s, and then doubled again in the ‘000s. Predictably, the number of subsequent arbitrations that the International Center for Settlement of Investor Disputes (or ICSID) has overseen has quintupled since the 1990s.
At the heart of cases like Goh’s and Danone’s is a lack of access to justice in China, because so many BITs between China and other countries remarkably included no proper legal recourse should an investor-state dispute arise.
Traditionally, China long-rejected the role of international arbitration in investor-state disputes involving foreign investors in China; insisting that investors only use local Chinese courts. As the Goh and Danone cases show, when CP local party bosses order it so, the Chinese court system becomes meaningless as a justice tool for foreign investors. It was for just this risk, that international arbitration, and specifically ‘ICSID,’ became the global gold standard’ for bilateral investment disputes.
There is a remarkably robust investor-state arbitration system that is both fair and effective: ICSID, under the aegis of the World Bank. China traditionally balked at including ICSID, or any other arbitration forum in its BITs, insisting investor-state disputes must be dealt with by Chinese courts, however corrupt.
The United States and China have been long negotiating their own BIT, in a process often stalled. Just recently, the Chinese sought to speed things up. It is vital, if the United States is to ensure the Rule of Law in US direct investments in China that the White House insists upon automatic recourse to ICSID in investor-state disputes, completely bypassing Chinese domestic courts.
Firms and investor groups should insist senators and congressmen ensure the Trump administration guarantees mandatory ICSID access in US investor-China investment disputes. If they do not, tens of billions of US pension funds and investors’ savings, could face corrupt theft.