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China’s Top Leaders Have Every Reason to Fear the Panama Papers

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A Chinese People's Liberation Army soldier at the Great Hall of the People in Beijing, China on December 23, 2014. Photograph by Andy Wong — AP

Of the elites whose offshore shell companies and dubious tax-dodging schemes are revealed by the leaked “Panama Papers,” those residing in Beijing perhaps have more reasons to panic than their counterparts elsewhere in the world. Embarrassment, fines, and perhaps resignation from public office (as in the case of the prime minister of Iceland) may be the price they have to pay. A small number may face criminal prosecution for tax evasion.

But the stakes are much higher for the Chinese political and business elites who find their names or their family members connected with the 11.5 million documents detailing offshore shell companies and other schemes to dodge taxes or hide wealth. Unlike any other country, China under President Xi Jinping has been on a three-year crusade against corruption and has so far imprisoned tens of thousands of crooked officials, including the country’s former security czar and 50 generals.

The first indication of how serious the Chinese government is treating the leaked “Panama Papers” is its instant and blank media ban on any coverage of the story. According to press reports, messages mentioning the word “Panama” have been systematically deleted by the country’s Internet censors. Obviously, Beijing would not have resorted to such draconian measures if the “Panama Papers” had not contained political dynamite that could cause huge political damage at the top of the Chinese Communist Party (CCP) leadership.

Technically, owning offshore shell companies does not violate Chinese law, but it does breach the CCP’s rules. The party expressly prohibits its members from “investing in companies outside Chinese borders.” They are also banned from using their influence to help their spouses and children engage in such activities. So if interpreted and enforced strictly, this rule could potentially nab all those CCP leaders whose families have engaged the Panamanian law firm, Mossack Fonseca, to set up their offshore investment vehicles.

Since President Xi’s own brother-in-law, Deng Jiagui, has owned such offshore investments with the aid of Moccack Fonseca, Xi has some explaining to do. If Deng has divested his offshore investments completely, President Xi will not suffer any loss of authority. However, if Deng or other family members of Xi continues to own such vehicles, China’s top leader will be seriously weakened.

Besides implicating the president’s family members, the “Panama Papers” also show that relatives of five current or former members of the Politburo Standing Committee, the regime’s top decision-making body, own similar offshore investment vehicles. They include, for instance, the daughter and son-in-law of Li Peng (premier from 1988 to 1998) and the granddaughter of Jia Qinglin (member of the Politburo Standing Committee from 2002 to 2012).

Such revelations can create a serious rift inside the regime. If Xi’s family members have not sold off such controversial holdings, his colleagues may breathe a sigh of relief since the Chinese president will find it impossible to use this incident against them. However, if Xi’s family members get rid of their offshore assets, the “Panama Papers” could provide fresh ammunitions for Xi’s battle against his rivals.

What is worth noting here is that, prior to the revelations provided by the “Panama Papers,” China’s most powerful rulers probably suspected each other of hiding assets abroad, but had no hard evidence. Now the “Panama Papers” have given the CCP documented materials with which they can wage internecine war on each other.

Besides possibly widening the rift at the level of the Politburo Standing Committee, the materials contained in the “Panama Papers” will also make Chinese top leaders lose credibility with their junior colleagues, such as members of the Politburo and the Central Committee. Like most kleptocracies, families of more senior Chinese leaders are higher on the food chain and have had more time to amass wealth and hide it abroad. In contrast, those occupying less lofty positions may lack the time or resources to acquire sufficient wealth to stash offshore. If this is the case, the evidence of clear violation of the CCP’s rules will devastate the standing of senior Chinese leaders in the eyes of their junior colleagues.

In light of the potential impact of the “Panama Papers” on the cohesion of the CCP, it is easy to see why the party wants to keep the Chinese public and most of its members from learning the truth. But Chinese leaders’ efforts to suppress this story, the most riveting since the Edward Snowden Affair, may be ultimately futile. The “Panama Papers” are a treasure trove of evidence of corruption and illicit acts at the highest level in many countries, including China. The consortium of investigative journalists, now the custodian of the “Panama Papers,” has released only a tiny portion of the documents. The CCP leaders may survive the initial shock, but the eventual weight of accumulated evidence and new revelations could be too heavy for them to bear.

Minxin Pei is a professor of government at Claremont McKenna College. His new book, China’s Crony Capitalism, will be published by Harvard University Press later this year.