China Graft Sets Back Industrial Overhaul By CHUIN-WEI YAP in The Wall st Journal, Sept 30, 2016

BEIJING—China is struggling with a string of rust-belt corruption cases that reflect the government’s troubles delivering on one of its signature policies: reducing the bloat in major industries that are dragging down the economy.
In the latest case, made public by official media this week, prosecutors accused a midlevel official of siphoning at least $6.3 million in government funds meant to help laid-off workers. Under the alleged scheme, prosecutors say local companies exaggerated the amount of production capacity they would close down, according to court documents reviewed by The Wall Street Journal.
The case, in the northern province of Hebei, joins a growing file of graft allegations involving state-owned industry and local officials in sectors the government has targeted for overhauls. Steel in particular has become a signal challenge for Beijing, exposing the limits of the leadership’s power and aggravating relations with major trade partners.
Rather than declining, China’s steel output capacity has more than doubled in the decade to 2015, reaching 1.2 billion metric tons. Beijing conceded last month it was still struggling to meet official targets to cut excess capacity. The exports have set off trade disputes with the U.S. and Europe and became a topic of fractious discussion at the recentGroup of 20 summit of major economies, which was hosted by Chinese President Xi Jinping.
Three years ago, Mr. Xi traveled to Hebei to lead a series of “self-criticism” sessions, reminiscent of reformist campaigns under Mao Zedong, that were intended to motivate officials to reduce capacity and end graft. State television showed authorities blowing up production lines.
As part of the corruption crackdown, late last year a provincial official in Hebei was convicted of accepting bribes totaling $3.5 million, including three valuable paintings by one of China’s pre-eminent watercolor artists given by a steel boss. In neighboring Henan province, state media reported this week that a court convicted a local official on charges of taking bribes in exchange for funneling more than $6 million to steel mills and other companies.
In the latest case, prosecutors said that An Xiaozhen, the midlevel official, used his influence as a deputy chief of Hebei’s operations department to steer the funds for assisting laid-off workers to at least six local companies that had exaggerated capacity reductions and layoffs. In turn, the companies—steel and zinc mills, a chemical maker, a cement plant, and a shoe manufacturer—allegedly sent kickbacks to Mr. An totaling nearly $400,000 over four years, state the court documents.
Mr. An was convicted and is in prison serving an 8½-year sentence. He couldn’t be reached for comment; calls to his lawyer went unanswered on Friday. In his defense, Mr. An admitted to the bribery charges but told the court that he didn’t view himself as having been derelict in his duties, the court documents show. He argued that provincial authorities should also take responsibility since they exercised final authority in awarding the funds. A Hebei official declined to comment on the case or make Mr. An available for interview.
In his city of Shijiazhuang, Mr. An presided over the process of directing layoff funds from provincial authorities, based on his inspection of government-ordered capacity reductions at local companies. The court documents, which are issued by the presiding judge, say Mr. An would phone up fellow officials in the counties under his jurisdiction, encouraging them to “thank the provincial leaders” when they made their applications for the layoff funds.
County officials would let companies overstate the amount of capacity they mothballed, the documents said. In return, the companies allegedly gave kickbacks to the officials, with Mr. An usually getting a prearranged 20% of the amount of state aid, the court documents said.
When one county official told Mr. An that his 20% cut would total 1.36 million yuan ($200,000), according to the documents, Mr. An said that he didn’t want to nitpick on “the fraction” with his junior colleague. “Just 1.3 million will do,” he’s quoted as saying.
As the economy slows and industries retrench,China is facing rising pressures to deal with rising unemployment. In recent years, the central government has set aside funds totaling about $15 billion to help laid-off employees as China tries to reduce the approximate one-third steelmaking capacity that isn’t used. The industry ministry didn’t respond to queries on how much of these funds might have been compromised by fraud.
Fraud has been a persistent feature of the country’s metals production and trade, according to official disclosures and analysts. The government began its campaign to crack down on some such practices two years ago.
Companies involved in Mr. An’s case told the court that there was generally a cavalier attitude among officials and businesses toward capacity cuts. Provincial officials say regulatory agencies “lack effective coordination” in implementing the central government’s orders for such cuts, the official Xinhua News Agency reported.
The court documents allege Mr. An and his colleagues made full use of such lapses.
“Sometimes I wouldn’t even show up to audit the capacity cuts,” Mr. An was quoted as saying. “Even those officials who show up just treat it as if they’re viewing flowers from horseback.” http://www.wsj.com/articles/china-graft-sets-back-industrial-overhaul-1475215837