Greasing the dragon: Foreign firms doing deals in China foot the bill for growing corruption. Teresa Poole in Peking looks at a practice that resists the party line

You get your health in spector, or your noise in spector, and their department might be having a lottery that month, so you buy a lot of lottery tickets. I've never heard of anyone winning a lottery.'

Corruption - or at least unorthodox business practice - is all- pervasive in China these days, and comes in many ingenious disguises. The example quoted, from Bob Broadfoot, managing director of Political & Economic Risk Consultancy in Hong Kong, would not cause most foreign business people to lose much sleep. But the situation can escalate quickly. Percentage kickbacks on contracts, 'study' tours abroad for senior staff, jobs or overseas education for officials' children have been added to the traditional gifts and lavish banquets that may be demanded by Chinese business people from foreign partners.

Guanxi - or the Chinese art of building relationships and obligations - is becoming much more expensive. Fast economic growth, coupled with the persistence of communist red tape, has created an environment that encourages shady practices 'with Chinese characteristics'. In the first instance, competition is fierce, so Chinese partners may openly suggest that rival foreign firms are offering better perks. Then, once a project is under way, the quickest way through China's bureaucratic maze is often with a chequebook.

According to a survey last year of Hong Kong businessmen, the expense of 'gifts' and guanxi inflates the overall cost of doing business in China by 3-5 per cent. The research was commissioned by Hong Kong's watchdog, the Independent Commission Against Corruption (Icac), and focused on Hong Kong companies that have manufacturing plants in the mainland. Of 50 firms that completed a questionnaire, 35 admitted paying bribes of between HKdollars 10,000 and HKdollars 500,000 ( pounds 43,700).

Since last autumn, the Chinese government has itself been campaigning against corruption. Last month the Prime Minister, Li Peng, said corruption was now 'a matter of life and death' for China. The 'abuse of power for personal gain, graft and bribery' must be 'punished unsparingly'.

It is seen as a serious threat to the Communist Party: 42,193 party members were disciplined for corruption in the last four months of 1993, according to the Central Commission for Discipline Inspection. Last month a vice-minister was sentenced to 20 years in prison for embezzlement and bribery, the most senior cadre to be toppled so far during the anti-corruption campaign. Prosecutors last year agreed to investigate 56,500 bribery and embezzlement cases, and Zhang Siqing, the chief prosecutor, said many involved huge bribes.

Practices that Westerners might regard as corrupt have in China become the accepted way of gettings things done. Ordinary Chinese citizens are increasingly disgruntled about petty graft; an anti-corruption telephone hotline set up by the Supreme People's Procuratorate has been swamped with calls. One complaint is that illicit fees are now the norm. Some schools charge students rent for desks and chairs, service fees are levied for buying tickets, cigarettes are necessary to persuade the telephone engineer to call, doctors demand extra fees in hospitals, and so on. It is estimated that party cadres spend 100 billion yuan ( pounds 8.3bn) a year on banquets.

For business people, there are many ways to oil the wheels of commerce. Trips abroad are the commonest perk. A foreign company selling a large piece of equipment may be expected to sweeten the sale by offering to take key personnel back to head office for 'training'. The company foots the bill for expenses, generous daily allowances and perhaps shopping. All this has the benefit of being perfectly legal.

On the other side of the fuzzy line between sharp business practice and criminal acts are requests by officials for illegal commissions to secure contracts, or demands for orders to be under-invoiced and the difference paid into foreign bank accounts. Somewhere in the moral middle ground are requests for jobs for officials' relatives, American college fees for their children, or 'gifts'.

In the face of this pressure, some foreign companies are putting up collective resistance. In Peking, Hill & Knowlton, the US public relations group, has an informal agreement with its main competitors, Burson Marsteller and InterAsia Communications, not to pay for Chinese media coverage of their clients. Some Chinese journalists demand 'appearance money' to turn up at press conferences.

It is unlikely, however, that corruption is yet deterring foreign businessmen from seeking to exploit China's commercial potential. Rather, as in most countries in Asia, it is simply another cost that has to be built into any project evaluation. Mr Broadfoot's Political & Economic Risk Consultancy, in its survey of regional managers, asks respondents to mark countries for corruption risks in categories ranging from zero (no problem) to 10 (extremely serious). China (7.69) does not fare worst, but is right up there with Indonesia (8.47), the Philippines (8.08), and Thailand (7.60).

According to Mr Broadfoot, there are bigger challenges facing foreign investors, such as quality control in manufacturing and setting up distribution channels. 'The problem of corruption, although recognised by everyone, was not top of people's list of concerns.'

In any event, much of what Westerners might categorise as immoral may not technically be illegal under China's penal code, which has not yet caught up with market-oriented reforms. 'How do you classify this sort of thing? . . . I think we use the word corruption a bit too loosely, I think blatant greed is more what we have been talking about,' said Mr Broadfoot. There are also big cultural differences. An official at the American Chamber of Commerce in Peking said: 'What Americans or other Westerners might call corruption is not generally called corruption in Asia.'

Li Yue, at the China International Business and Investment Consultant Co, a new consultancy service under the leadership of the Ministry of Foreign Trade and Economic Co-operation, said: 'I think the biggest problem is they (Western companies) lack an understanding of China . . . It is very difficult to understand each other because of different culture and history.' He said Westerners did not like to employ more workers than were necessary and were not sympathetic to China's need to safeguard employment. 'Another particular problem is the laws, because Western people usually have a very strong sense of laws . . . So they always ask for complicated and detailed laws to guarantee them. But in China legislation is not very advanced.'

Some company managers may be in the dark about what actually happens on the ground. One Hong Kong Chinese salesman for a large American company explained the difficulties he encounters because of the need to pay kickbacks to mainland officials in order to get the company's products into the best retailing outlets. Filing his expenses claim to head office for a work visit to China was a nightmare, because all the pay-offs had to be disguised.

The Chinese authorities are now trying to crack down on business fraud. Last month in Wuhan in central China, officials shut down 26 joint ventures that were front companies which never did any business. In Canton, in the south, and Shenyang in the north- east, another 100 joint venture licences were revoked. A joint venture has the right to import a foreign car, which is often kept for personal use or sold at a big profit.

In February Wei Jianxing, Secretary at the party's Central Commission for Discipline Inspection, announced actions by cadres that would be outlawed. Among them were: buying imported and luxury cars, including financing vehicles for leading officials with loans; buying houses at prices lower than advertised, or decorating private houses lavishly with public funds; exceeding local criteria for receptions; and using public money to organise lavish activities and spending on weddings, funerals and birthdays.

The judicial system, despite its shortcomings, is also becoming more active. Last year 159,700 economic crimes were reported. Business lawsuits reached 894,000, involving pounds 5.4bn.

For the Communist Party, corruption is as much a political as an economic problem. Anger at official graft was one of the main reasons more than a million people joined the pro-democracy movement in Peking in June 1989. A recent report from two analysts at the Chinese Academy of Sciences said: 'If corruption, as a social problem, remains rampant after many attempts have been made to correct it, then it means it is inherent in the government . . .'