Corruption and Ethics in China’s Banking Sector

NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.

NB: All your data is kept safe from the public.

Introduction

China is one of the emerging economic powers in the globe with its banking sector being comprised of local and international investors. However, its efforts to become the world’s economic leader may be derailed by the rampant corruption in the public and the private sector. The country has been accused of allowing business malpractices among businesspersons. Corruption has specifically risen to uncontrollable levels especially in the construction and the banking sector. In the banking sector, corruption is evident in the hiring process whereby nepotism is a common phenomenon (Hasan, Wachtel, and Zhou 165).

Issuing of gifts is also common among the Chinese businesspersons, which facilitates bribery in the country. The Chinese business culture borrows heavily from the concept of the Confucianism culture, which is the traditional culture of the Chinese. The mentioned culture advocates for the establishment of a hierarchy in all organizations. The junior employees perceive the topmost officials in the hierarchy as their role models, and they accord them great respect. The junior staff members have to embrace the decisions made by the senior officers who are usually business leaders with great influence.

Given that the leaders are the sole decision makers, they have the ability to promote bribery without whistleblowing from the junior officers. The foreign companies operating in China face great competition from the local financial firms due to the additional foreign regulations that multinational companies operating in the country have to observe. The legality of gifts among the Chinese firms have been greatly connected to the rising bribery cases since bank managers collect bribes in the name of gifts from friends and business associates. In most countries around the globe, corruption is perceived as a serious crime, and the firms operating in China have to observe the rules regulating corruption in their home country.

Corruption in the Chinese banking sector is characterized by the extraction of money from borrowers in exchange for soft loans. The hiring process too is tainted with corruption, as the human resource managers tend to hire relatives of the senior government officials. Whistleblowing in China is not a common phenomenon due to the respect accorded to the senior officials. The role of whistleblowers cannot be underrated in the fight against corruption and other business malpractices. Another factor that complicates the fight against corruption is the lack of strong anti-graft institutions to investigate and institute charges against corruption perpetrators. Despite there being relatively strict laws against graft, the anticorruption institutions are weak and perpetrators of the vice tend to escape the law. In that regard, corruption in the banking sector is high with nepotism and issuing of gifts being the most prevalent forms of corruption.

To eliminate the vice, enactment of strict laws coupled with the establishment of strong anticorruption is inevitable. Besides, all the stakeholders in the banking sector should be trained in the banking ethics, and they should be advised about the negativities of the practice. Recruitment of new staff should be based on merit, and it should not be the exclusive role of the managers. Regular audits should be conducted to detect the prevalence of nepotism and the appropriate actions taken against the respective managers. The government should enact laws to protect whistleblowers to empower employees and other stakeholders to report cases of bribery. More standardized code of conduct should be enforced and all the stakeholders trained on its effective application in the sector. All the mentioned causal factors and the recommendations thereof shall be discussed in detail in this paper.

This research paper seeks to explore corruption in the Chinese banking sector and determine the ethical provisions regarding the practice. The paper shall discuss the recommendations listed above in details to advise the relevant authorities on the measures that they may adopt to mitigate corruption that has escalated in the past few decades. Additionally, the paper shall examine the major ethical theories to determine the legality of the said practice in China.

Background information

Corruption refers to the act of giving or obtaining monetary or non-monetary benefits in exchange for a wrongful favor. Corruption has been cited as one of the challenges facing the global economy. In China, corruption has escalated in the past few decades prompting the authorities to impose strict rules to regulate it. As of 2014, China ranked in the 80th position out of the 178 comparison countries in the Transparency International’s Corruptions Perceptions Index, against the US, which ranked position 19 (Zhu and Wu 324). The ranking of China among the most corrupt countries is illustrative of the rampant corruption both in the state and in the private sector.

Different countries have varying laws governing corruption with some countries taking corruption as a criminal offense while others take it as a civil wrong. In most global countries, corruption is deemed a criminal offense punishable by a jail sentence or a hefty fine. In America, corruption is a civil tort and perpetrators of the vice are subject to fines determined by the courts. In some countries such as Mexico, graft is deemed a criminal offense punishable by a jail sentence. In the past, China been reluctant in the fight against corruption due to the Confucianism culture that allows issuance of gifts. However, following pressure from the international community and the lobby groups the Chinese government has launched anti-graft campaigns aimed at alleviating the practice.

Even though statistics indicates that corruption is more inherent in the construction industry, the Chinese financial sector is equally affected by the vice. In the financial sector, corruption revolves around giving of loans to individuals and corporations who do not meet the set criteria. It involves approval of loans by bank managers to persons or corporations upon the payment of a stipulated amount of cash or upon the advancement of a non-monetary benefit. Corruption is more prevalent in the state-owned financial institutions as opposed to the privately-owned banks.

The prevalence of corruption in the public banks is attributable to the lack of stringent internal and external controls to regulate the conduct of the state officers in charge of such banks. Apart from bribery in the approval of loans, corruption is also evident in the hiring process whereby the managers tend to higher staff based on their relationship with the prospective candidate. In most cases, the hiring process involves extraction of money from the candidates by the managers in exchange of the available job vacancies. In some situations, the relatives of senior government officials obtain wrongful favor from the bank managers. This leads to the recruitment of the wrong individuals into the workforce. Economic experts have cited corruption in the banking industry as a major challenge affecting the financial sector.

The Chinese banking sector is composed of two types of banks namely the public and the private banks. The public institutions are owned by the state, and they include the ABC, Bank of China (HKG: 3988), China Construction Bank Corporation (HKG: 0939) and Industrial and Commercial Bank of China (HKG: 1398).Initially, the Chinese financial sector was composed of the public banks. However, following the rapid growth of the economy, commercialization of the banking sector became inevitable. The commercialization of the sector resulted in the emergence of private bankers that now form a great percentage of the country’s financial institutions. Corruption in the state-owned banks is high than in the private sector apparently due to lack of sound internal and control systems.

Literature review

Zheng et al. cite the culture of the Chinese as the major contributor of the rapid corruption in the country (382). The Chinese business norms are premised on the Confucianism culture that is predominant among the Chinese communities. Under the Confucianism culture, the staffs in an organization have differential powers and authority determined by the ranking of each official in the hierarchy. The culture is grounded on two major principles viz. hierarchy and respect for leaders. The top most official in the hierarchy has superior powers to the others in the hierarchy.

The term leader according to the mentioned culture denotes anyone holding a superior position. Such people are perceived as special, and their subordinates must accord them respect. A junior staff cannot challenge the decisions made by a leader since that would amount to blasphemy. The respect accorded to the leaders allows them to give or receive bribery without being questioned by the junior staff. Perhaps what complicates the fight against corruption further is the fact that the managers of the various financial institutions collude with politicians who are the key policymakers. The politicians tend to defend the corrupt officials complicating the work of the anti-graft officials.

The Chinese anticorruption commissions are charged with the responsibility of investigating corruption cases and making recommendations to the relevant authorities for action against the perpetrators. In most cases, corruption is politicized denying the commissions a chance to conduct investigations independently regarding the alleged corrupt practices. Politicians are the policy makers hence the powers of such bodies largely depends on the political atmosphere.

Moreover, corruption in the Chinese firms involves favoritism of politicians by the bank managers, hence the reduced ability of the anti-graft bodies to extirpate corruption. The successive Chinese regimes have been reluctant in the fight against corruption until President Xi Jinping ascended to power in the year 2012. Since his inauguration into the presidency, he has launched rigorous campaigns against corruption in the public and the private sector. Under his regime, various senior officials have been prosecuted among them being CEOs of some of the leading banks.

Hasan, Wachtel, and Zhou argue that one of the corruption practices evident in the Chinese banking system is nepotism (163). The human resource managers tend to hire their relative when new job opportunities arise in their respective banks. In that regard, the financial sector is comprised of individuals from certain families drawn from the managers’ clans or the families of senior government officials. In hiring the senior official’s relatives, the managers are motivated by the desire to create a rapport between them and the officials to obtain business favor sponsored by such officials.

Nature of corruption

Corruption in the Chinese financial sector takes the following two forms

Favoritism in new staff recruitment
Issuance of monetary and non-monetary gifts

Favoritism in new staff recruitment

The hiring process in the Chinese banks is characterized by intense bribery whereby the prospective candidates give gifts to the human resource managers in the exchange for preferential treatment during the recruitment. Apart from the mentioned kind of bribery, most banks in the country tend to hire relatives of the government officials to benefit from favorable policies from the influential officers. The local financial firms are the most corrupt perhaps due to the acceptability of gifts as a legal business practice. However, in the recent past, the foreign firms operating in the country have also been accused of bribing the government officials to obtain similar favors.

Gifts in exchange for approval of soft loans

Most cases of bribery involve the bank managers and the borrowers who give bribery to have their loans approved. Usually, loans are given reference to the terms set by the bank and any lending not within the stipulated policies is against the law. Borrowers, who do not meet the borrowing criteria established by the lenders, end up bribing the managers to obtain the loans without following the due process. This aspect leads to the advancement of loans to persons who do not meet the borrowing criteria. It may lead to losses for the concerned financial firm since the borrowers may not be creditworthy leading to the accrual of bad debts.

Corruption in the Chinese financial sector is more prevalent in the state-owned corporations than it is in the private institutions. The view is attributable to the bureaucracy evident in the public institutions. Bureaucracy refers to the abuse of an office by a leader owing to the authority accorded to him/her by the employer. The state officers heading the public institutions have great authority, and they tend to use their power to acquire unwarranted favor from borrowers (Cheng and Ma 173). The ABC Company, which is one of the biggest state-owned financial institutions, was recently implicated in corruption.

In the mentioned case, Yang, the vice president of ABC bank accepted a sum millions of money to approve loans for a group of borrowers. ABC is the China’s largest lender and its implication in corruption is a clear indicator of the intensity of corruption in the banking sector. Following the wrongful approval of the loans, ABC bank reported losses since some of the recipients of the loans failed to pay back the loans. A sum of $480 million in loans had been advanced to the borrowers in the controversial transactions.

Bureaucracy extends to other state corporations related to the financial sector such as the insurance sector. Most companies in China are state-owned, which creates bureaucracy in their administration. Officials from the government operate the state corporations, and they have great power and influence over other sectors. They oversee the licensing, and they authorize all the transactions between their respective corporations and other external firms. Given that the banking sector is heavily reliant on other sectors, such as the insurance industry, bureaucracy in the state-owned corporations elevates corruption practices as the firms seek to obtain favor from the managers through bribery (Hasan, Wachtel, and Zhou 166). Financial institutions, especially the foreign firms, result in giving bribes to such officials for fast approval of their business deals.

Corruption in the Chinese financial sector is set to reduce due to the increased foreign investment in the country. The foreign bankers especially the American banks are strictly forbidden from receiving or giving bribes to the governments of the nations where they operate. The foreign investment Act regulates the American corporations doing business in foreign countries and sets the ethical standards to be observed by such companies during their engagement with the respective countries of operation. The Act also spells penalties for noncompliance with the stipulated restrictions.

The American government has prosecuted a handful of bank managers for wrongfully bribing Chinese officials to obtain favor from the government. Other cases are still under investigation by the relevant American authorities. However, rooting out corruption in China is a hard task given that the culture of corruption is within the society, and it has been a legal business practice since the country acquired its independence. The attempt by the foreign governments to discourage their investors in China to reject corruption may have positive effects in the fight against graft.

Impacts of bribery in the Chinese financial sector

The first adverse effect of corruption in the financial sector revolves around the introduction of unqualified personnel in the workforce. The majority of the persons who join the sector through corruption are unqualified. The sector requires persons with proper knowledge regarding the ethical code of ethics governing the financial sector. Holmes argues that recruiting staff based on corruption only heightens bribery in the sector since the hired individuals lack ethical knowledge (156).

In light of the statement, corruption in the financial sector should be condemned, and only the qualified individuals should be allowed to occupy the various vacant positions. Secondly, corruption in the award of loans is harmful to the sector since it may result in losses for the banks regarding bad debts. Usually, bad debts are written off against the profits of a firm hence an increase in bad debts means diminished profits.

Prosecutions of senior officials

In an attempt to extirpate corruption in the Chinese banking industry, the Chinese government under the leadership of President Xi Jinping made steps that aim at weeding out corruption. Under his leadership, various bank managers have faced charges of corruption. Additionally, the communist party’s anti-graft agency, the Central Commission for Discipline Inspection, have been conducting investigations on financial institutions to detect cases of graft. The majority of the bribery cases investigated so far centers on individuals who are mainly former bank managers, the CEOs, and other senior staff. Some of the major individuals who have been prosecuted for graft are listed below.

Zhou Caikan

Zhou was the former head of a regional branch of China’s central bank, and he was arrested and prosecuted for alleged corrupt dealings with the Kinghing Trust and Investment. The case revolved around an estate that Kinghing Trust and Investment Company had procured at market price and then sold it to Zhou at a discounted price. The huge discount allowed to the accused prompted the Central Disciplinary Commission of Zhejiang province to launch investigations to unearth any corrupt dealings between the two parties.

Tao Liming

Tao is a former president of the Postal Savings Bank of China, which is among the largest banks in the country. He was arrested and charged with wrongfully approving loans to persons who did not meet the specified criteria.

Zhang Enzhao

Another senior person to face investigations for bribery is Zhang. He was the former head of China Construction Bank, who was later jailed for 15 years after he pleaded guilty of accepting bribery to approve loans. He conceded to having illegally obtained gifts and bribes worth $500,000.

Analysis of corruption through ethical theories

Utilitarianism

The Utilitarianism theory of ethical conduct calls for the selection of the course of action that maximizes the gains for the beneficiaries. In the context of the Chinese financial institutions, the decision to hire connected staff is against the principles of the mentioned theory since it benefits only the concerned parties (Zheng et al. 376). The unselected qualified candidates are aggrieved by the decisions hence the benefits accrue to a few people. Additionally, the hiring may result in the introduction of unqualified staff in the firm leading to poor performance. The shareholders of the firm require higher returns from their investment, and thus the diminished profits emanating from corrupt practices is in the interest of a few individuals at the expense of the larger group.

Deontological

The deontological theory of ethics is premised on the argument that the right decision depends on the expectations. In other words, the right decision is determined through an exploration of the relevant rules and the societal expectations. Given that corruption is illegal in China, the banking officials are not justified to use their positions to acquire undue favor from the customers.

Virtual ethics

Based on the virtual ethics theory, the right decision depends on one’s perception regarding moral behavior. This theory emphasizes on the personality of the individual in determining what is right or wrong in various contexts. The intention of the doer of the action is evaluated when determining the legality of the action. In the context of the corruption in the Chinese financial institutions, the officials perpetrate corruption for their interest. Their actions are not in good faith hence they are not justifiable.

Ethical relativism

The theory of ethical relativism defines ethical behaviors as the right behaviors stipulated by a certain culture. Under the principles of the mentioned theory, the right decision is determined upon examination of the person’s cultural norms and beliefs. What is right in one culture may be wrong in the other. Based on this theory, corruption in the Chinese financial sector may be justifiable since under the Confucianism culture, giving gifts is acceptable (Zhu and Wu 311).

Recommendations

One of the factors that contribute to the escalation of corruption in the Chinese financial sector is the lack of a uniform code of ethics. The government in consultation with the stakeholders should create a universal code of conduct applicable to all the financial institutions in the country. The code should provide the standards of ethical and unethical behavior and spell out the penalties for non-compliance (Cheng and Ma 172). The anticorruption institutions should be empowered to investigate and charge perpetrators of corruption.

As it stands now, the anticorruption institutions present in China do not have the mandate to launch criminal proceedings against corruption perpetrators. Their role is only restricted to investigating the allegations and making recommendations to the office of the prosecutor. The lack of direct connection between the investigator and the institutor of the charges may lead to the manipulation of evidence gathered by the anticorruption bodies. In light of the mentioned view, the anticorruption bodies should be empowered to launch proceedings against corruption perpetrators.

Another measure that could be undertaken to mitigate corruption in the banking sector is illegalizing all forms of gifts. Gifts are normally acceptable as an ethical business practice in China, which facilitates corruption by the officials. The government should enact legislations that bar the banking officials from receiving any form of gifts. In most cases, officers receive bribery branded in the form of gifts.

In many other countries, the issuance of gifts to state officers is taken as bribery, and the giver, as well as the recipient, may be charged for advancing corruption in their respective offices. China should adopt a similar approach to the issuance of gifts by illegalizing the donation of gifts in any form. The only gifts that should be allowed are the ones that are issued to the community by the organization in its corporate philanthropic work. However, such gifts should be disclosed in the financial statements to root out corruption.

There should be incentives to promote compliance with the set rules to ensure that corruption is reduced to acceptable levels. The incentives should come in the form of recognition and publicity of managers who comply with the set standards (Holmes 46). A list of the complying firms should be regularly publicized to encourage others to follow suit. Training of the managers and the other stakeholders should be launched countrywide to educate the concerned groups about the importance of embracing the rules. The training should center on the set standards and should be done through seminars and conferences bringing together the different stakeholders in the banking sector. Managers should be educated on the negative effects of corruption, and they should be encouraged to drop it for the favor of the organization.

The hiring process in the banking sector should be based on merit whereby the government should set the minimum qualifications for the staff in the banking sector. Regular audits should be carried out to ensure that the employees hired have the right qualifications. Setting the minimum qualifications for the staff in the sector will avert nepotism since managers must recruit the workforce based on competitive application. Encouraging diversity in the workforce could also be a sure way of dealing with corruption during the hiring process.

The government should enact legislations requiring workforce diversity to bar the managers from recruiting employees of their choice. Organist ions should be trained of the benefits that accrue from diversity in the workplace that include the introduction of different talents into the organization. Workforce diversity introduces different talents in the firm and increases the organization’s knowledge of the market. Such benefits should be cited in the education forums organized to cause managers to embrace such diversity.

Encouraging whistleblowing could be another way of alleviating corruption in the sector. Whistleblowers should be protected under the law to increase their chances of reporting corruption perpetrators. Such protection revolves around providing immunity to the whistleblower against any intimidation from the employer following such reporting. In most cases, volunteers of important information regarding corruption are prevented from doing so due to the fear of losing their jobs.

The government should enact legislations barring employers and business leaders from discriminating against employees who provide useful information regarding corruption in the banking industry (Zheng et al. 377). The government should also establish toll-free telephone numbers to facilitate the reporting of corruption cases. Employees and junior staff tend to give better information about their leaders when anonymity is guaranteed hence establishing such telephone numbers may go a long way in attracting whistleblowers. Additionally, the anti-corruption bodies should encourage the use of the Internet-based reporting channels to report such cases. The Internet guarantees the anonymity of the whistleblower leading to the reporting of various corruption cases.

The relevant authorities should investigate all the reported cases and the necessary actions taken against those found guilty of the alleged crime. Media freedom should be guaranteed to encourage the discovery of corrupt dealings within the different sectors. Currently, the Chinese government has imposed restrictions on the media, which limits its ability to publicize corruption allegations (Houston, Lin, and Ma 335). The fight against corruption is limited by the fact that politicians tend to exercise protectionism.

Conclusion

Corruption in the Chinese banking sector has escalated in the past few decades with managers being accused of encouraging corruption in the hiring process. Managers have also been accused of taking bribes from customers to approve their loans. Corruption in the recruitment process leads to the introduction of the unqualified staff within the workforce leading to poor performance in the sector. The absence of strong anti-corruption institutions in China has been attributed to the rising corruption cases. Additionally, the Chinese business culture tends to favor corruption by the senior staff.

The business culture borrows heavily from the societal norms of the traditional Chinese community. Confucianism is the dominant culture of the Chinese. The mentioned culture emphasizes on the hierarchy and respect for the senior staff. In that regard, business leaders are perceived as the sole decision makers whose decisions must be respected. Owing to the respect accorded to the leaders, they are at liberty to make undesirable decisions without getting punishments. To mitigate the vice, the government should formulate a strict universal code of conduct and encourage the stakeholders to embrace it. Protection for whistleblowers should be enhanced to promote the reporting of corruption cases.

Records from the anti-graft bodies indicate that corruption is more prevalent in the state-owned financial institutions than it is in the private sector. The high corruption in the public sector may largely be attributed to the bureaucracy evident in the public institutions. Initially, the Chinese banking system was made up of public banks that were owned by the state. The private banks emerged after the banking sector was commercialized allowing private investors to set up banks. Most of the privately-owned banks in China are companies owned by either the local or the foreign investors. Some of the biggest state-owned banks include the ABC, Bank of China (HKG: 3988), China Construction Bank Corporation (HKG: 0939) and Industrial and Commercial Bank of China (HKG: 1398). Some of the listed banks have been implicated in corruption cases, a clear indicator of the intensity of corruption in the Chinese banking sector.

Works Cited

Cheng, Hongming, and Ling Ma. “White collar crime and the criminal justice system: Government response to bank fraud and corruption in China.” Journal of Financial Crime 16.2 (2009): 166-179. Print.

Hasan, Iftekhar, Paul Wachtel, and Mingming Zhou. “Institutional development, financial deepening, and economic growth: Evidence from China.” Journal of Banking & Finance 33.1 (2009): 157-170. Print.

Holmes, Leslie. Rotten states: Corruption, post-communism, and neoliberalism, Durham: Duke University Press, 2006. Print.

Houston, Joel, Chen Lin, and Yue Ma. “Media ownership, concentration, and corruption in bank lending.” Journal of Financial Economics 100.2 (2011): 326-350. Print.

Zheng, Xiaolan, Sadok Ghoul, Omrane Guedhami, and Chuck Kwok. “Collectivism and corruption in bank lending.” Journal of International Business Studies 44.4 (2013): 363-390. Print.

Zhu, Jiangnan, and Yiping Wu. “Who pays more “tributes” to the government? Sectoral corruption of China’s private enterprises.” Crime, Law, and Social Change 61.3 (2014): 309-333. Print.

Click Here To Order Now!