Den of "Big Rats" in Chinese Grain Depots

A Chinese news magazine reported this week that 110 managers of grain depots in Henan Province have been ensnared in corruption probes. Operators of local grain warehouses routinely paid bribes to superiors who turned a blind eye to subsidies paid for nonexistent grain reserves and embezzlement of funds for warehouse construction. The behavior uncovered in the probes has been going on for years, and the revelations about these "big rats" in official media appear to be part of this year's broader crackdown on corrupt officials pushed by new President Xi Jinping.

According to news magazine Liaowang, the investigation was kicked off in 2011 when the head of the Zhoukou, Henan branch of Sinograin--China's reserve management company--fled the country with more than 300 million yuan in pilfered funds. Investigations found a chain of corruption from local depots to the head of Sinograin's Henan Province branch. The general manager of the Henan had a mafia-type operation, collecting routine bribes from a network of local depot managers amounting to 14 million yuan plus 8.9 million yuan of property he couldn't account for. The general director was sentence to life imprisonment and his wife and mistress got 7 and 8 years, respectively.

A "big rat" is caught stealing from the granary. Cartoon from Guangzhou Daily.

The Henan general director was accused of regularly taking bribes from 65 people. One depot director explained, “He had power over promotions, transfers, fund disbursements, so 'holiday fees' became commonplace." The bribes started out at 3000-5000 yuan each several years ago but grew to 10,000 yuan last year. One depot director reportedly paid 23 bribes totaling 1.9 million yuan. One level down, the depot managers also took bribes from their underlings.

One technique for stealing funds is to collect subsidies for holding grain purchased for government reserves to support prices. Each metric ton can bring in a 50-yuan purchase fee, 86 yuan in storage fees, 30 yuan for expenses of rotating grain, and a differential between purchase and sale prices. The same grain is sometimes sold in multiple transactions, a practice known as "circular grain" or "round-tripping." Numerous private traders paid bribes to gain approval as purchasers of market intervention grain.

Some dealers and depot managers colluded to create fake purchases. Investigators found forged purchase documents and farmer ID cards used in the illicit transactions.

According to Sinograin accounts, 80 percent of Henan's wheat was purchased by Sinograin depots in 2009 and 2010. It is estimated that actually less than half of the wheat was purchased. Liaowang reports estimates that no less than one-sixth of the grain reserves in Henan are "round-tripped" through such fake transactions.

Another strategy is to embezzle funds for construction or equipment purchases. Some grain warehouses were built in a shoddy manner, were nonexistent, or sold to Sinograin at excessive prices. Depot managers pocketed the extra funds.

The Liaowang article blames the problem on lack of oversight and a "hills are high and the emperor is far away" attitude. The central Sinograin headquarters and its provincial branches are a separate legal entity from the local depots. Sinograin has little vertical control over local managers and only half-heartedly looked into reports of problems or turned a blind eye. Beijing Sinograin officials generally only wrote checks and came to inspect well-run model depots. Personnel are posted in the same location for many years and develop relationships with local traders and others with little supervision from above, creating "dens of thieves."

Described as a "typical" case, the director of the Zhoukou depot embezzled hundreds of millions of yuan during his ten-year tenure. He made dozens of trips abroad, misused passports and used funds to make investments in the United States in order to facilitate emigration of his wife and child.

These revelations concern only one of China's 31 provinces. In May there was a suspicious fire at a grain reserve depot in Heilongjiang that burned up thousands of tons of grain. The timing of the fire was suspicious because investigators had just arrived to look into misallocations of funds.

A former grain bureau director interviewed by Liaowang praised the grain market intervention policies for their great achievements in stabilizing markets. But he also called the den of thieves in Henan a painful lesson that calls for better management and organization. However, it seems inevitable that putting people in control of large amounts of other peoples' money with little or no accountability will inevitably lead to corruption and abuse.