The case of the Chinese guanxi networks and their challenge by a formal legal system
Matthias Schramm and Markus Taube
Introduction
In recent years reports of corrupt behaviour by officials have become a regular feature of the Chinese media, revealing a substantial permeation of Chinese society by corruption. Indicating the true dimensions of the phenomenon of corruption in today’s China Jiang Zemin, President of State and General Secre- tary of the Communist Party of China, has been quoted as evaluating the struggle against corruption in the party and government as ‘a matter of life and death of the party’ (AFP 2000).
Corruption is neither a new phenomenon in China (Heberer 2001), nor is the degree of corruption really outstanding in comparison to other world regions.1 The organization of many corrupt transactions in China, however, provides a perfect example of the suitability of social networks and economic clubs to provide a full infrastructure for conducting and safeguarding corrupt deals. Two examples indicate the importance of the traditional Chinese guanxi networks for the facilitation of corruption in China:
1 The former mayor and party secretary of Beijing, politburo member Chen Xitong, was arrested and convicted of charges of corruption in 1995. In the following months it became obvious that for years a network of cadres, whose formal power was supplemented by informal connections among them, had not only been controlling some of the most lucrative industries in the city but had also employed this power for illicit personal gain. Chen Xitong alone was said to have accepted bribes amounting to US$2.2 billion for awarding permissions for construction projects. The guanxi network stabilizing this ‘Chen system’, and ordering the transactions within the core group, had been strengthened from the outside by strong personal connec- tions to the very top of the central leadership and their children – who were also participating in the economic rents created in the run of Beijing’s system reforms and opening up to the outside world. Protected by such a densely knit network of personal connections, Chen Xitong and his col- leagues believed themselves to be protected against internal disruptions as
well as attacks from the outside. Rightly so. Eventually, it took nothing less than a power struggle at the very top of the Chinese party echelon, to bring the ‘Chen system’ down (Bo 2000; Gilley 1998; Tsang 1998).
2 Another widely publicized case of guanxi-based corruption concerns the Yuanhua smuggling scandal. During the latter half of the 1990s the Yuanhua Group of Xiamen in Southern China made use of a wide network of personal relationships, with officials occupying leading positions in virtu- ally all areas of the political and economic system. They smuggled oil, cars and other goods worth up to US$10 billion into the PR China. This guanxi network that Yuanhua not only employed but at the same time meticulously cultivated and proactively extended, provided a perfect frame- work for the payment of bribes and facilitated behaviour by officials that made it possible to give all smuggling activities the appearance of officially promoted, legal transactions. Yuanhua’s transactions enjoyed the support of the party secretary as well as of the vice-mayor of Xiamen, the director of the local customs office, a bank president, public security officials, managers of trading corporations, etc. The person occupying the highest rank of those having been publicly accused (and convicted) of being a member of the smuggling network is Li Jizhou, then the PR China’s vice-minister of public security. The smuggling activities were so well embedded in the social networks permeating Chinese society that serious actions to unveil and stop the smuggling activities were started only after influential state- owned enterprises had employed their own guanxinetworks to complain in Beijing about the flood of cheap imports which were further eroding their already poor business performances – and therefore endangered Prime Minister Zhu Rongji’s plans to reform the state-owned enterprise sector.2 The integration of corrupt transactions in the social interaction patterns of guanxinetworks, which had been the organizational backbone of the Chen and Yuanhua corruption schemes, lies at the centre of interest in this chapter. The study sets out with an analysis of the order-creating function of the Chinese guanxinetworks (pp. 183–5). Against this background we discuss the relativity of the concept of ‘corruption’ in the context of guanxi networks and analyse their particular suitability to solve the problem of order inherent in corrupt transactions (see pp. 185–7). The topic of China’s fight against corruption is discussed on pp. 187–92: is it possible to break up the ‘symbiotic’ – or shall we say ‘parasitic’? – relationship between guanxinetworks and corruption by estab- lishing a new formal legal system styled on Western models? Building on an analysis of the complementary and substitutive relationship between guanxiand a formal legal system we conclude with an assessment of the tasks ahead for the fight against corruption in the PR China (see pp. 192–3).
182 M. Schramm and M. Taube
Private ordering in the confines of the Chinese guanxi networks
The Chinese guanxinetworks can be understood as institutions that arose many centuries ago as a means to stabilize social relations. They were used to secure trade relations in an environment that became increasingly complex but was only insufficiently covered by an overarching system of order (Carr and Landa 1983; Posner 1980). The environment economic actors were facing was charac- terized by either a complete lack of formal systems of order, or the existence of the legal system was coming along with certain elements of arbitrariness that compromised this institution’s power to put order into economic interaction.3
Fulfilling its function of providing microcosms of personalistic order in an environment characterized by intransparent formal rule setting and rule execu- tion, the institution of guanxinetworks has survived through the centuries and become an integral part of the Chinese social system. Especially since the begin- ning of the reform period in 1979, the organization of economic activities by means of guanxinetworks has regained importance. The Chinese reform model of gradual transition which has been advancing the restructuring of institutional conditions in the form of a hardly foreseeable trial-and-error procedure (Rawski 1999: 142) has been a cause of great institutional uncertainty in economic interaction (Wank 1999: 251). The reform period has been characterized by the dissolution of established, central-administrative ordering mechanisms and a not-always simultaneous creation of new, more strongly market-oriented ele- ments (Tao and Zhu 2001: 3; Wank 1999: 264, 266). This has led to institu- tional vacua which have been often filled by economic actors spontaneously reverting to traditional, institutional arrangements and behaviour patterns, and thus to a new heyday of a personally oriented, relational assurance of transac- tions in guanxinetworks (Nee 2000: 68; Chan 1999: 317; Hu 1998: 199–220;
Yan 1996: 19).4
Within the Chinese language the term ‘guanxi’ has multiple meanings and is used in various contexts. It can refer to (a) the existence of a relationship between people who share a common element, (b) actual connections with fre- quent contact between and within groups of people, and (c) a contact person with little direct interaction (Fan 2002a: 371f; Bian 1994). As vague and multi- faceted as the usage of the term ‘guanxi’ is, so is the interpretation and descrip- tion of its functional principles in the literature, reaching from ‘friendship’ (Pye 1982), ‘particularistic ties’ (Jacobs 1979), ‘reciprocal exchange’ (Hwang 1987) to ‘social capital’ (Butterfield 1982). Commonly, guanxi is defined as some kind of ‘special relationship between a person who needs something and a person who has the ability to give something’ (Osland 1990: 4–5); in a wider sense this means ‘relationships or social connections based on mutual interest and benefits’ (Yang 1994: 64f ). All in all even these broad and general defini- tions fall short on a very important element: of course, guanxi networks are based on personal relations, but they are marked by certain common elements such as its members coming from the same village or region, having served in
the same military unit, sharing attributes like staying in the same party units, schools, associations, etc.5 However, membership in a guanxi network is not limited to such common experience but can also be arranged by a person in a position of trust whose reputation is the guarantee for the proper behaviour of the person introduced. In this way individual people are able to expand their radius of economic relations, backed up by guanxi networks (Krug and Polos 2000). By accepting a gift or service, the involved person obligates himself to perform an undefined reciprocal service at an unspecified time in the future (Fan 2002b; Yang 1994). Thus, an implicit contract is concluded, the fulfilment of which is linked to the particular network (Hsing 1998: 134ff.). Lastly, the acceptance of these contracts establishes obligations that constitute a mutual dependency within the network.
Therefore, the ordering problem lying at the centre of the institution of guanxi networks is that individuals are faced with the problem of conducting transactions in an unstable institutional and therefore high-risk environment which – at least to some degree – requires transaction-specific investments without the chance of referring to an independent formal legal system. In this context, the Chinese guanxi networks provide a practicable and, under the given conditions, transaction-cost minimizing (best practice) solution: the mutual exchange of services and the acceptance of abstract debt obligations is the main integrating force within a guanxinetwork. It can be understood as a mutual investment in social capital (Dasgupta and Serageldin 1999), which con- stitutes the framework of a system of order that coordinates the interaction between the network members (Butterfield 1982; Bourdieu 1986). The guanxi networks themselves may be understood as clubs that guarantee their members the enforceability of available property rights in an environment of institutional disorder, and thus are lowering transaction costs (Lee, Pae and Wong 2001;
Luo 1997). The expenses necessary for club membership (gift-giving, mutual exchange of favours, etc.) have to be understood as investments in social capital which upon joining take the characteristic of sunk costs. Once having joined, the club assures the disposal of property rights to a certain degree: as long as the individual performs economic transactions within the club – i.e. among and with other club members – contract fulfilment is assured in that information regarding the honouring or breaching of contracts spreads rapidly among the club members. Cooperative, contract-honouring behaviour thus becomes the dominant strategy even in one-shot games (unique transactions between club members), since these unique games are bound up in an iterative system of mul- tiple games (transactions) with other club members (Axelrod 1983). As Davis puts it, guanxinetwork transactions are ‘the equivalent of an infinitely repeated game with a set of people they know’ (Davis 1995). Honouring contracts and cooperative behaviour is positively sanctioned by the possibility of engaging in further, low-cost transactions with club members. In contrast, the response to opportunistic behaviour is a withdrawal of goodwill or even exclusion from the club (Wank 1999), which, for the club member affected, not only means the loss of investment but also a massive cost increase for future transactions (Carr 184 M. Schramm and M. Taube