Pacific Money

The Privacy vs. Transparency Debate in China

Tougher privacy laws threaten to take China in the wrong direction when it comes to official transparency.

These are busy days for China’s corruption fight.  No sooner had the once great Politbureau member Bo Xilai’s trial concluded, than subsequent investigations centred on a political-economic “clique” connected to Petrochina (CNPC) hit the headlines, and seem to be in the process of snagging former security “tsar” and Politbureau Standing Committee Zhou Yongkang, as well as recently promoted head of the State-owned Assets Supervision and Administration Commission (SASAC) Jiang Jiemin, amongst others.  

Whilst this may or may not be the beginnings of an assault on big State Owned Enterprises (SOEs), the jury is also still out on whether these high level cases along with the multitude of lower level ones constitute a genuine attempt to root out and tackle China’s endemic corruption problem, or whether this is yet another political factional struggle being resolved, as in the past, through “corruption take-downs.”

On a note of pessimism, one big clue to answer this question may have been raised in The Diplomat’s China Power blog recently. Colleen Wong ‘s article joined an existing chorus of voices calling for a “sunshine law” in China.  A “sunshine law” is the metaphorical name for a government policy that would force officials to disclose their personal assets. The idea being that such disclosures should at least help in the battle against corruption and graft. The significance of a strong sunshine law for China is so great that many would claim that the lack of one proves that the government’s anti-corruption drives are mostly just rhetoric and cover for political infighting.

For example if Official A turns out to own multiple real estate properties, but has a salary that would make such acquisitions unlikely, then warning lights would go on. Of course there may be other innocent explanations for the assets (such as inheritance, legitimate business gains etc), but more importantly there are numerous ways to hide assets from even a “sunshine law.” Dummy corporations can be used to obfuscate the financial trails; family members can hold assets or exercise control of corporations anonymously. 

It is in regard to this question and recent events in China that an issue raised earlier this year on Pacific Money can be revisited. Some believe that the transparency and availability of open corporate data (including of course the type that would have to be readily available if a sunshine law were to be effective) is being compromised as the official Chinese campaign against online rumours and abuse of privacy has recently emerged.

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First, it should be noted that there are serious and genuine issues in China with regard to online activities which need to be tackled. These include the activities of online “black” PR firms (which companies can pay to do to their competitors the opposite of what normal PR firms might do), false social media statistics and “for hire” followers (which compromise attempts at effective social media analysis) and a genuine propensity for damaging online rumours to spread—which seems especially potent in China given the official government media’s lack of credibility. On the other hand, netizens and their sharing of information online have been responsible for the discovery and investigation of several Chinese officials, showing that the internet can be a force for good.

China’s tightening privacy laws however, threaten to seal off a whole load of information which may be material with regard to investment due diligence and transparency—whether it be online or off. One famous investigator, Briton Peter Humphrey, was recently arrested for illegally obtaining private data on Chinese citizens. Pacific Money has no wish to comment on his particular case, but the pressure being placed on forensic accountants and investigators threatens to set China back in terms of its risks for investors.   

After the string of accounting scandals that plagued Chinese companies over recent years, Beijing’s reaction so far has not been positive. Privacy concerns and the push to protect data and stop rumour-mongering may be valid policies, but it will be a great shame if they were to compromise China’s massive need to improve its accounting and disclosure standards or its much hyped official drive to root out corruption.  Some may wonder if the controversial exposés of former Premier Wen and current President Xi’s families’ assets (published last year in the New York Times and on Bloomberg), along with the reputation-damaging short seller investigations, may have pushed China’s policymakers in the wrong direction.