How Corruption Gives License (Plates) to Print Money in China

 | Oct 19, 2017 | 11:00 AM EDT
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Behind all the pomp and circumstance of the party congress in Beijing, China's Communists can credit any mandate they may have to a thriving economy, not the high-browed Communist theory they are sprouting this week. That talk outlines how their modern spin on Marxism is perfect for this "new era" of "socialism with Chinese characteristics. 

The "socialism" is in fact capitalism with a political dictatorship sitting atop it. China is all about making money, and the Communists hope the masses will focus on that, rather than getting any jumped-up ideas about political reform.

The men in suits do a pretty good job of running the economy, which yesterday reported growth of 6.8% for the third quarter. That was slightly better than expected. Although it was a notch lower than the 6.9% in the first half of the year, it puts China on track for 6.8% for full year 2017. That would see China post its first economic advance this decade, up from 6.7% last year, notes economist Aidan Yao at AXA Investment Managers -- the first gain since growth peaked in 2010.

China's gradual transition from "factory to the world" to developed nation is behind that growth. Retail sales rose 10% last quarter, and consumption now accounts for 65% of all economic growth. Online sales, which Yao notes are a better indicator of private consumption, ramped up 34% over last year. Services now make up 53% of the economy, compared with 40% for manufacturing.

Yao foresees a strong November for Alibaba (BABA) , with the made-up "Singles Day" event on Nov. 11 spurring heavy spending. Those strong sales should also benefit JD.com (JD) , appliance chain Suning Commerce Group SH:002024, VIP.com online-discount operator Vipshop Holdings (VIPS) , white-goods merchant Gome Retail Holdings (GMELY) and other leading e-commerce operators.

The Communists are of course aided by their ability to command overnight change in any law, commission whatever construction project they choose, wherever they want, and obstruct both money leaving the country and coming in to industries and sectors they don't want.

While I was driving to my tennis match against the Police Force last night (I lost, by the way ... presumably a good idea if you want to stay out of jail,) my buddies were having an interesting conversation that illustrates how modern China works. They were discussing the market for license plates.

Specifically, cross-border license plates that allow a car to travel between Hong Kong and mainland China. As a special administrative region of China, Hong Kong has its own laws, immigration and car registration. The rules of the road are different. Here in Hong Kong, we have them. In China, they're written down on paper. In reality, anything goes.

We even drive on a different side of the road: left, in the former British colony of Hong Kong; right, in mainland China. China originally drove on the left, but switched in 1946 mainly because Americans drove that way, setting the auto-navigational reserve currency.

Hong Kong and China have different car registration and licensing systems, as well as driving licenses. You have to have a mainland license to drive in China -- the international permit that will do elsewhere won't do there. You can convert a driver's license only from Hong Kong and, for some strange reason, Belgium into a Chinese license.

And you have to have dual plates on your car, from both Hong Kong and typically the province of Guangdong next door, to drive across the border.

There are 29,600 cars licensed in Hong Kong for travel in China, and 3,300 Chinese cars that can come to Hong Kong. So far, so good.

In theory, it costs HK$800 ($103) to apply for a Chinese plate in Hong Kong -- as long as you have a company that has invested 8 million yuan ($1.2 million) in Guangdong Province and paid 300,000 yuan ($45,000) in taxes. In practice, it will cost you a lot more than that.

The only way to reliably get one of the cross-border plates now in existence is to go through a broker. They have the company already set up that has made the necessary investment, so all you have to do is buy the plate that cost HK$800 in application fees off them. This, incidentally, comes with a car.

My teammate Alan, who runs the local operations of a large insurer, spent HK$1.4 million ($180,000) to buy one of the plates. Yesterday, he then had to go to the border, cross it with his car, get the plates put on his car in China, file all the paperwork -- and wait. 

And wait and wait. He waited all day, worried he wouldn't make our tennis match, until he thought to ask if there was any way of speeding things up. After paying a "fast-processing" fee that most definitely was not a bribe, he got the necessary permissions.

There are more license plates in the works. There's a massive white elephant of an infrastructure project under way here linking Hong Kong with Macau and Zhuhai, across the Pearl River Delta, by bridge. That will allow travel between Hong Kong and Macau, a former Portuguese colony that also drives on the left, and mainland Zhuhai.

You'll have to go on a shuttle bus across the bridge, unless you're one of a few thousand people who get a license plate allowing that trip. The initial run for sale was 3,000.

Zhuhai is on the western edge of the Pearl River Delta, and therefore far removed from the region's industrial heartland around Dongguan and Shenzhen, east of Guangzhou. That makes access across the bridge, to Zhuhai, a lot less attractive than by land, at the three points across the Hong Kong border to Shenzhen. As a result, the plates are a lot cheaper.

My teammate Alan reckons he can get a Zhuhai plate for HK$250,000 ($32,000) or thereabouts. They're selling for HK$500,000 ($64,000) or more on the black market already. The plate allowing him to drive to Shenzhen already in hand, he's now spending that added cash to be able to go across the bridge.

So on the drive to our match, my teammate Kelvin, who works for one of the import/export trading companies that source production and goods in China, was all ears. Both Alan and Kelvin envision driving with their families into southern China for weekend getaways. But more than anything, both have the resale value of the plates in mind, too. The HK$250,000 cost now could be a bargain if prices head in the direction of the existing plates.

Kelvin was keen to know how well Alan knows his contact getting the license plates. It's still not sure that you'll get a cross-border plate, even if you come up with the cash (although some of it will be returned minus some "processing fees" if you miss out). The plates are granted by the good graces of the mainland officials giving them out, so the better placed you are, and the more cash you have, the better the chance of getting one. 

Alan says he has known his friend for years. Alan actually increased his fee by HK$50,000 ($6,400) because his buddy, who originally quoted him a lower price, said that might be more certain of currying official favor. Now Alan is thinking about getting a third plate -- and Kelvin his first.

Were China a free economy that actually follows its own rules, there wouldn't be a need for "fast-processing" fees, and such a huge black market for plates. The price would be set by the government, and access granted first-come, first-served.

But this is "socialism with Chinese characteristics." This is a classic example of "rent seeking," in which bureaucrats do nothing other than siphon off cash for being in power and granting a piece of paper. In which a little, or in this case a lot, of cash will speed the wheels of bureaucracy dramatically. It can even buy a word in the right official ear.

Is a new era of that socialism upon us? Well, you'll have to pay a fast-processing fee to see.

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