Leaks About Chinese Offshore Dealings Threaten Xi Jinping Campaign

Relative linked to three shell companies

Xi Jinping

Xi Jinping / AP

BY:

Disclosures that a relative of Chinese leader Xi Jinping purchased shell companies in the British Virgin Islands through a law firm linked to tax evasion schemes are raising questions about the anti-corruption drive currently underway in Beijing.

The Panama Papers, based on internal documents obtained from the Panamanian law firm Mossack Fonseca, reveal that Xi’s brother-in-law, Deng Jiagui, acquired three companies in the British Virgin Islands in the early 2000s, although details on how the companies were used have not been disclosed.

Concern about the impact of the foreign investment disclosures can be seen in the extensive Chinese government censorship imposed on all reporting of the Panama Papers throughout China’s Internet.

To further highlight the extreme concern among Chinese leaders, western news outlets are being blocked in order to prevent reports on the scandal from reaching the Chinese public, which boasts some 721 million online users.

Other leaders linked to the Panama documents and the use of offshore companies include associates of Russian President Vladimir Putin, whose overseas stash of cash is estimated to be in the billions of dollars; the offspring of Pakistani Prime Minister Nawaz Sharif; and the father of British Prime Minister David Cameron. Iceland’s prime minister recently resigned over the disclosures.

Nearly a third of all business done by Mossack Fonseca came from the law firm’s offices in China and Hong Kong.

An estimated $1 trillion was moved out of China last year, according to financial industry estimates.

Chinese leaders frequently use overseas shell companies to hide cash obtained from state-run and other businesses over concerns the money will not be safe if kept within reach of Chinese authorities. Wealthy Chinese also fear the slowing economy in China may be a sign of a future economic decline.

Relatives are frequently used as cutouts for Chinese officials and leaders to avoid direct involvement in the overseas money-hiding schemes.

The documents are the latest example of improper financial dealings by Chinese elites that have been catalogued in foreign press accounts for years.

The International Consortium of Investigative Journalists, which reported on the 11 million leaked Panama Papers, revealed in 2014 that Deng and other senior Chinese leaders’ relatives were using offshore companies.

Other high-ranking Communist Party of China officials implicated through relatives in the shady overseas companies include:

  • Li Xiaolin, daughter of former Chinese Premier Li Peng;
  • Lee Shing Put, the son-in-law of Zhang Gaoli, a current member of the Politburo Standing Committee, the collective dictatorship that rules China;
  • Jia Liqing, daughter-in-law of Standing Committee member Liu Yunshan;
  • Zeng Qinghua, brother of Zeng Qinghong who was vice president of China from 2002 to 2007;
  • Hu Dehua, son of the late Chinese leader Hu Yaobang; and
  • Chen Dongsheng; grandson-in-law of late Chinese Communist founder Mao Zedong.

The linkage between Deng and Xi, however, represents potentially damaging political fallout for the Chinese Communist leadership. Since taking power as party general secretary, Xi has made battling corruption at both high levels and throughout the entire bureaucracy a top priority.

The nature of Xi’s relationship with his brother-in-law is not known, and the paper trail indicates Deng’s three companies were dormant by the time Xi took power in 2012.

However, the use of relatives to hide money in British Virgin Island companies, if confirmed, could be explosive for Xi, who many analysts say has been using the current anti-corruption drive to consolidate power by eliminating potential rivals. Now, those rivals might be able to use the Panama Papers revelation to discredit and possibly unseat the Chinese leader.

News reports also have quoted Xi as besieged by opposition Party factions. They have been described as the "Oil Faction," headed by ousted security chief Zhou Yongkang, and the "Secretary Faction," led by Ling Jihua, former chief of staff to former supreme Party leader Hu Jintao.

Zhou was among two senior Party leaders, who have been ousted as "tigers" in the Xi anti-corruption campaign. The second was regional party leader Bo Xilai, who was charged with corruption and imprisoned for life in 2013.

In the military, Xi sacked two former vice chairman of the Party’s powerful Central Military Commission (CMC), the organ that controls all armed forces and armed police.

On Monday, former CMC Vice Chairman Gen. Guo Boxiong confessed to taking bribes, the official Xinhua news agency reported, adding that Guo’s family members who were involved in the case "will also be dealt with."

Former State Department official John J. Tkacik, a China affairs specialist, said tight controls over Chinese media mean the impact on Xi likely will be limited.

"Certainly, new revelations about Xi's brother-in-law working through shell corporations don't enhance Xi's image as an implacable foe of nepotism and official corruption," Tkacik said.

"It will be interesting to see how he chooses to handle it, though," he added. "I presume that Xi and the [Communist Party of China] will basically ignore it."

Tkacik said China’s propaganda czar, Liu Yunshan, also is linked to the scandal, along with economic boss Zhang Gaoil, and all mention of these leadership links has been scrubbed from the Internet.

"In fact, most Chinese billionaires are still standing, and most senior Party cadres are now loyal to Xi, so I doubt there is any upside to Xi's making any more examples of anyone," Tkacik said.

Xi could use the Panama Papers to purge more senior politicians or Party plutocrats, "just to remind everyone who’s in charge," he said.

Xi’s brother-in-law Deng gained wealth through real estate business and overseas dealings that are common knowledge within Chinese business circles. As a result, they were subjects of financial news reporting outside China for years.

However, if another prominent figure had failed to obtain the Party’s blessing in setting up overseas shell companies and bank accounts he could find himself subject to investigation—an unlikely prospect in this case considering Deng’s family connections.

In China, personal and political connections, called "guanxi," are a dominant feature of the reform Communism in place since the 1980s. The reliance on connections rather than rule of law frequently results in some of the widespread corruption that currently is a key feature of China’s system.

Larry Wortzel, a former U.S. military intelligence officer once stationed in Beijing, said China he expects China will aggressively try to blunt the impact of the disclosures about Chinese leaders’ involvement in offshore companies.

"I think the PRC government censors will do all they can to prevent the news from getting through," Wortzel said, using the acronym for People’s Republic of China.

"But if the information is reported fully, and it is true that the accounts were dormant for some time and went dormant before Xi began his [anti-corruption] campaign it would likely blunt the impact," he said.

In China, it is not illegal to own offshore companies. However, the use of secretive companies to hold funds undermines the official image of Chinese leaders who are expected to lead uncorrupted lifestyles.

Willy Lam, a Hong Kong-based political analyst, said Chinese censors are working overtime to squelch reports based on the Panama Papers. However, the activities of Xi's brother-in-law and older sister are well documented in China’s social media and will have a big impact on Xi, he said.

"His Mr. Clean patina is damaged," Lam said. "Moreover, the Panama Papers show his anti-graft campaign is selective. Very few fellow princelings [wealthy offspring of Communist leaders] have been put under investigation, and they remain a privileged Red Aristocracy which is somewhat above the law."

Lam said Xi is still firmly in control but his enemies are lurking beneath the radar. "They will pounce on him, using the excuse of the Panama Papers, if Xi makes a big mistake in either domestic or foreign policy," he said.

The identity of the source who leaked the 11 million documents from Mossack Fonseca has not been disclosed.

Ramon Fonseca, founding partner of law firm Mossack Fonseca, told Reuters in Panama City that the documents were hacked.

Brookings Institution analyst Clifford G. Gaddy suggested in an article Thursday that the document leak may have been a Russian government political influence operation, since the disclosures fail to link Putin directly to hidden cash.

"This information will not harm Putin at all—instead, it gives Putin cover, so he can shrug and say: ‘Look, everybody does it,’" Gaddy said.

Putin, however, denied he was involved in any corruption related to the papers and blamed the disclosures as part of a U.S. plot to weaken Russia.

Russian state news media also censored reporting on the documents.

Social media analysis of the Chinese Internet reveals that Beijing propaganda authorities launched a comprehensive crackdown aimed at silencing all commentary and reporting on the Panama documents, even including online posts that sought to refute the connections between Xi and Deng.

China Digital Times reported that Beijing propagandists sent a memo this week that stated, "Please self-inspect and delete all content related to the ‘Panama Papers’ leak."

According to analysis of the microblog Sina Weibo, six of the top 10 most searched terms on Chinese search engines were related to the Panama Papers. The high percentage suggests the issue currently is China’s most sensitive topic.

Among the terms censored in both English and Chinese are "Panama," "Panama Papers," "Xi Jinping and his beloved" and "Li Xiaolin," former Premier Li Peng’s daughter.

Censors also targeted western news outlets, including Russia’s Sputnik, the Wall Street Journal, and the Financial Times. CNN and BBC broadcasts also were blocked.

As a result, many Chinese have been left largely in the dark about the allegations of Chinese leaders’ hiding wealth in offshore companies.

Official Chinese news media have carried reports without mentioning the names of Chinese implicated in the documents.

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