Mao Yushi, 2011, from Wikipedia

Biography: Mao Yushi, Recipient of the 2012 Milton Friedman Prize for Advancing Liberty from the Cato Institute

China is a kleptocracy of a scale never seen before in human history. This post aims to explain how this wave of theft is financed, what makes it sustainable and what will make it fail. There are several China experts I have chatted with – and many of the ideas are not original. The synthesis however is mine. Some sources do not want to be quoted.

The macroeconomic effects of the Chinese kleptocracy and the massive fixed-currency crisis in Europe are the dominant macroeconomic drivers of the global economy.

“The Macroeconomics of Chinese kleptocracy,” by John Hempton, Bronte Capital, June 10, 2012

Although the private wealth of the [Chinese Communist] party’s princelings — the well-connected sons and daughters of top officials — is usually well-concealed, they are increasingly dominating the market for blocking and lubricating the arteries of public- and private-sector wealth. Stock exchanges double as vehicles for converting family political capital into cash, which can be re-converted into political power, sometimes by means as blatant as “auctioning” official positions for sale. State-owned enterprises and bureaucracies can be ruled like personal fiefdoms, with contracts allocated to relatives and useful friends, while entrepreneurs shift their profits and loyalties in exchange for regulatory protection.

Some of China’s most respected public intellectuals are warning that society and economy are being held hostage to the wealth-maximizing requirements of the political elite. These warnings echo privately in business circles, too, where entrepreneurs continue to be enthralled by the prospects of short-term profits but increasingly alarmed about their personal and financial security. Officials in developed countries, and even Chinese entrepreneurs themselves, report a steep increase in business people and capital leaving China. “Nine out of ten of my business clients are in the process of applying to emigrate, if they haven’t already,” one of China’s most successful investment bankers told me last week (he is in the process of emigrating to Canada). Executives at state-owned companies have grown incapable of acting in the interests of their companies, he says, and China’s entire system of allocating resources “is malfunctioning.”

“A Family Affair: China’s princelings are running amok. And Bo Xilai is just the tip of the iceberg.” by John Garnaut, Foreign Policy, May 30, 2012

Last year, China tested a prototype stealth fighter and launched its maiden aircraft carrier, to augment new destroyers and nuclear submarines. What is unknown, however, is whether the Chinese military, an intensely secretive organisation only nominally accountable to civilian leaders, can develop the human software to effectively operate and integrate its new hardware.

Judging from a recent series of scathing speeches by one of the PLA’s top generals, details of which were obtained by Foreign Policy, it can’t: The institution is riddled with corruption and professional decay, compromised by ties of patronage, and asphyxiated by the ever-greater effort required to impose political control. The speeches, one in late December and the other in mid-February, were given by Gen. Liu Yuan, the son of a former president of China and one of the PLA’s rising stars; the speeches and Liu’s actions suggest that the PLA might be the site of the next major struggle for control of the Communist Party, of the type that recently brought down former Chongqing party boss Bo Xilai. Liu is the political commissar and the most powerful official of the PLA’s General Logistics Department, which handles enormous contracts in land, housing, food, finance, and services for China’s 2.3 million-strong military.

“No country can defeat China,” Liu told about 600 officers in his department in unscripted comments to an enlarged party meeting on the afternoon of Dec. 29, according to sources who have verified notes of his speech. “Only our own corruption can destroy us and cause our armed forces to be defeated without fighting.” This searing indictment of the state of China’s armed forces, coming from an acting full three-star general inside the PLA, has no known modern precedent.

“Rotting From Within: Investigating the massive corruption of the Chinese military.” by John Garnaut, Foreign Policy, April 16, 2012

Toward the end of 2009, casino operator Las Vegas Sands Corp., struggling under $11 billion of debt and strapped for cash as the weak economy ravaged its business, received a surprising offer that could have relieved some of its woes.

The offer came in emails from an outside legal adviser with political connections in China and Macau, the world’s biggest gambling market, where the company’s local unit was going public.

The adviser said he was approached by “someone high ranking in Beijing” who proposed that Las Vegas Sands pay $300 million to win long-awaited government approval to sell a luxury-apartment complex in Macau and to settle a contentious lawsuit, according to emails reviewed by The Wall Street Journal.

These days, Las Vegas Sands is flourishing, buoyed by Asia’s gambling boom. But the emailed offer underscores how high—and dangerous—the stakes are for U.S. companies whose fortunes depend on Macau’s lucrative casino market, which last year raked in more than five times as much gambling revenue as the Las Vegas Strip and is tightly controlled by the government.

“Backdoor Macau Deal Was Proposed to Sands,” by Kate O’Keefe, WSJ, June 7, 2012

The House Intelligence Committee is conducting a remarkably detailed and bipartisan investigation of ties between the Chinese government and two Chinese telecom equipment giants, Huawei and ZTE. These companies have been the objects of widespread security fears that their equipment would enable Chinese interception of US telephone calls, expanding American cybervulnerabilities from computer networks to all communications.

“House Intelligence Committee investigates Chinese telecom firms,” by Stewart Baker, June 13, 2012

Also see “Data Points and Article Links” by Patrick Chovanec, June 10, 2012