Runaway corruption in China, says a compelling new report, poses a lethal threat to the nation's economic development and "undermines the legitimacy of the ruling Chinese Communist Party."

Evidence from official audits, press articles and law enforcement data, the report says, indicates that "corruption in China is both pervasive and costly." Bribery, kickbacks, theft and fraud, particularly by party and government officials, are said to be rampant.

Minxin Pei wrote the report, issued last month by the Carnegie Endowment for International Peace, based in Washington. Pei, who gives his name in Western fashion, family name last, is a political scientist educated at the Shanghai International Studies University. He earned his Ph.D. at Harvard, and his work has been widely published in the U.S.

The report asserts that corruption in China "has spillover effects beyond its borders" that hurt American, Japanese and other foreign investors. "Illicit behavior by local officials could expose Western firms to potentially vast environmental, human rights and financial liabilities," the report contends.

Public statements by President Hu Jintao, Prime Minister Wen Jiabao and other senior officials suggest that China's leaders are well aware of the widespread corruption but have been unwilling to curb it. The report says: "The odds of an average corrupt official going to jail are at most 3 out of 100, making corruption a high-return, low-risk activity."

The reason: If President Hu comes down too hard on corruption, he risks losing support of delegates to the recently-held party Congress who elected him. Those delegates are drawn largely from party officials at the local and provincial levels.

Pei is not alone in assessing corruption in China. George Zhibin Gu, an investment banker who was educated at Nanjing University and earned a Ph.D. at the University of Michigan, has suggested that corruption may destroy China's economy that has been surging ahead at 8 to 10 percent a year. In the West, a 3 percent growth rate is respectable.

Moreover, China's government-controlled news agency, Xinhua, frequently details specific instances of corruption. Last week, the Chinese government was reported to have banned fire department officials from receiving sexual favors from companies seeking their protection.

Scrutinized through a wide-angle lens, corruption is but the foremost of the internal ills that jeopardize China's economic and political strength. Unemployment and under-employment, in which a worker has only one or two days of work a week, may be more than 25 percent.

Paradoxically, China has begun to experience shortages of skilled labor needed for its expanding industry. Economic progress has been uneven, with coastal cities leaving the rural interior far behind.

The one-child policy, enforced by compulsory abortion or infanticide, has caused social unrest by producing an imbalance between men and women because baby boys are favored over girls. In China there are about 117 men to 100 women, meaning that 17 men cannot find wives. That has led to kidnapping girls or importing women from Southeast Asia.

"Corruption in China," says the Pei report, "is concentrated in the sectors with extensive state involvement." That includes construction of dams, roads and electrical grids. The sales of land or granting user rights are susceptible, as are financial services and heavily regulated industries.

"The absence of a competitive political process and a free press in China makes these high-risk sectors even more susceptible to fraud, theft, kickbacks and bribery," the report says. Pei cites a study done last year asserting that about half of those engaged in corruption were involved in infrastructure projects or land transactions.

Even so, the report says, "Beijing punishes only a very small proportion of party members or government officials tainted by corruption." Some measures, however, are draconian. Perhaps the most visible recent instance was the execution in July of Zheng Xiaoyu, director of the State Food and Drug Administration, for taking bribes totaling $850,000 from eight pharmaceutical companies.

American, Japanese and other foreign investors may be put at a competitive disadvantage by rivals who engage in illegal practices to win business in China, the report says. "Corruption puts Western firms' intellectual property rights particularly at risk because unscrupulous local officials routinely protect Chinese counterfeiters in exchange for bribes."

While the Pei report doesn't say so, U.S. firms that pay bribes may violate the Foreign Corruption Practices Act of 1977 that forbids bribery or kickbacks abroad, no matter the customs of other nations. Further, the report says, "Corruption in China affects other countries through the spread of cross-border crimes such as drug trafficking, human smuggling and money laundering."

Richard Halloran is a Honolulu-based journalist and former New York Times correspondent in Asia. His column appears weekly in Sunday's Focus section.