How Corruption Fuels Inequality in China

After Chinese President Xi Jinping rose to power in 2012, his government launched a sweeping anticorruption campaign that attracted worldwide attention for its scope and determination. Powerful figures, long considered untouchable, were found guilty of bribery or of misusing funds and jailed. These punishments initially encouraged the impression among some commentators that Xi might be using the initiative to sideline or persecute his political opponents. But the effort to root out corruption has gone well beyond personal power politics. Conducted by the Central Commission for Discipline Inspection, an organ of the Chinese Communist Party, it has been the largest anticorruption campaign in history anywhere in the world. By May 2021, almost ten years into the campaign, the CCDI had investigated a total of over four million people within the government and CCP apparatus, finding 3.7 million of them guilty.

The public investigation and prosecution of corruption at such a scale occurred against the backdrop of widening inequality within China. This was not a mere coincidental correlation. Inequality in China, especially that within cities, soared after the reforms of the 1980s and then surged even more after the privatization and restructuring of many state-owned enterprises in the early 1990s. Greater productivity and wages in high-tech sectors and the increasing share of income from capital fueled urban inequality from the top; at the bottom of the urban income ladder, the inflow of workers from the countryside—many of whom lack urban residence permits and will accept low wages—fueled inequality from below.

With more wealth sloshing around the Chinese economy, corruption has been on the rise in recent decades. But until now, no one has studied empirically the characteristics of the people whom the CCDI has found guilty of corruption or tried to establish empirically the extent to which corruption has contributed to inequality. As it turns out, a detailed analysis of CCDI data reveals a pattern: not only was corruption among the people at the top of the Communist Party’s bureaucratic and technocratic hierarchy very high (in terms of average sums of money embezzled); it also contributed significantly to inequality, entrenching the already wealthy in an even more impregnable upper class.

TIGER DON

Thanks to the centralized nature of the anticorruption campaign and the Chinese government’s publication and systematization of relevant data, scholars can now assess the dynamics. Using the data compiled from individual conviction cases, we have constructed a database of senior Chinese officials found guilty of corruption between 2012 and 2021. The data set includes detailed information for 828 criminal cases of corruption and 686 convicted individuals (some individuals were accused and convicted of more than one crime). They are all members of the CCP, high up in the government or party hierarchy or managers in state-owned enterprises; in the language of the anticorruption campaign, they are the “tigers” guilty of the most significant crimes, as opposed to the multitude of “flies” (low-level officials) who have also been caught up in the investigations. Until the advent of Xi’s campaign, many of these figures were considered untouchable.

The CCDI categorized the convicted in order of importance as centrally managed cadres, provincially managed cadres, and central-level cadres. Centrally managed cadres are the most senior officials, such as the provincial ministers. They are appointed or removed by the CCP’s Central Committee. Provincially managed cadres are managed by the provincial branches of the CCP; their ranks include mayors and secretaries of cities. The third group includes somewhat less important officials, such as managers of state-owned enterprises. For the sake of simplicity, we shall refer to these officials respectively as national, provincial, and local nomenklatura.

An analysis of the CCDI data set reveals the scale of the corruption by rank of official. When placed alongside Chinese urban household surveys (tigers tend to live in urban areas), the data set allowed us to estimate the lawful income of those convicted of corruption and their position in urban income distribution, revealing how important they were in ordinary economic and political life and where exactly their corruption took place. By contrasting the defendants’ estimated lawful income with the amounts they were accused of embezzling, we calculated how much corruption increased their income, how much it enabled them to climb up the ladders of Chinese income distribution, and how such corruption affected the levels of inequality in Chinese cities.

Unsurprisingly, the data have shown that the more senior the convicted figure, the more significant the scale of the official’s corrupt activities. Members of the national nomenklatura have been convicted of embezzling more than four and a half times as much money per case as members of the provincial nomenklatura and more than three times as much as those of the local nomenklatura. The most senior officials listed in the data set were accused, on average, of embezzling $14.1 million, provincial nomenklatura of embezzling $2.8 million, and the local nomenklatura of embezzling $4.3 million. (The local figures are higher than the provincial figures because they include many managers of state-owned enterprises for whom corruption appears to be particularly lucrative.) Members of the provincial nomenklatura are accused of the bulk of corruption cases (two-thirds), but since the embezzlement per case of officials in the national nomenklatura is so much greater, two-thirds of the total corruption measured in money terms is related to them.

The convicted officials hail almost entirely from the higher parts of the Chinese urban income distribution. More than half of them would be in the top five percent of the urban income distribution with their legal incomes only; some six percent would be in the top one percent, with annual incomes greater than about $30,000 per person (or $120,000 per household if the household consists of four members).

Through corruption, however, the median defendant made from four to six times as much as their legal earnings. The defendants thus climbed to the very top of China’s urban income distribution. Factoring in their illegal income, 82 percent of those guilty of corruption were among the top one percent of city dwellers, and almost all were in the top five percent.

Corruption itself was heavily concentrated in the upper echelons, with the top ten percent of cases responsible for 58 percent of the total sum embezzled. By contrast, the top ten percent of earners in urban China make 33 percent of total income. The concentrated nature of corruption—and the fact that it benefited people who were already among the wealthiest in China—shows that corruption, in its revealed part, is an important contributor to Chinese urban inequality.

THE PUBLIC PURSUIT OF PRIVATE GAINS

These results demonstrate the enormous extent of corruption at the very top of China’s urban income distribution. Even people with high legal incomes can multiply their incomes, on average, by a factor of four to six—and some, obviously, by even more. The results imply that real income inequality in the country is much greater than recorded levels of inequality. Corrupt incomes, after all, are not reported to the tax authorities, and they are unlikely to be reported in household surveys. Nevertheless, the conspicuous consumption of members of the elite and their way of life make the corruption evident to observers. Xi’s campaign, whatever its political motivation, is likely reducing income inequality and, perhaps more important from the authorities’ point of view, curbing excessively high income and the concurrent flaunting of such wealth.

That outcome might explain the campaign’s popularity. Anticorruption campaigns, especially if they don’t shy away from going after the very rich and powerful, can be useful for autocratic regimes to boost their populist credentials. Russian President Vladimir Putin’s recent purge of corrupt generals in the midst of a war was unusual, but it follows under-the-radar anticorruption moves that began simultaneously with the invasion of Ukraine. The Angolan government’s case against the businesswoman and former political scion Isabel dos Santos likewise proved very popular. Vietnam recently engaged in a similar “cleansing” campaign at the very top of its Communist Party.

Observers have found Xi’s anticorruption campaign to be ruthless and often vindictive in its targeting of potential rivals. But overall inequality in China, as measured by the Gini coefficient—which runs from zero, a hypothetical case of full equality in which every person earned the same amount, to 100, another hypothetical case in which a single individual made all the income—has come down in the last decade from a peak of 43.7 in 2010 to 37.1 in 2020, according to World Bank data. Whatever its sins, the anticorruption campaign has sought to strike both symbolically and in real terms at the rampant inequality in the country.