Friday, September 29, 2006

Clean Sweep In Shanghai

By Paul Maidment and Shu-Ching Jean Chen

China's President Hu Jintao has been eradicating the influence of his predecessor Jiang Zemin since the day he took over the more powerful post of party leader in 2002.

The sacking and arrest of Chen Lianggyu, the most senior Chinese Communist party in Shanghai, on corruption charges, and his suspension from the party's top leadership council, the Politburo, plunges the knife as deep as Hu has yet dared into the so-called Shanghai faction, the associates of Jiang, whose political patronage has cast a long shadow over both city and national politics for two decades.

Removing such a senior Communist Party member is rare. But it shows how rapidly Hu is consolidating his power and extinguishing Jiang's waning political influence in advance of next year’s party congress.

That meeting will confirm the candidates from which the next generation of China’s leaders will emerge after Hu steps down, probably at the time of the congress after that, in 2012. A preparatory party meeting is due next month.

Hu has been steadily strengthening the party's central control over its local cadres. It is closely vetting potential Congress delegates and aims to select new local leaders in 14 provinces by the end of this year and in all the provinces by next spring.

Hu still has to bargain with some local power-brokers, so other high-profile dismissals may follow if Hu feels there is a need to encourage "cooperation."

Weakening their potential patronage is a key tactic. New party rules forbid the increasingly widespread practice of buying and selling government positions. Hundreds of officials have been disciplined and publicly exposed for engaging in such practices.

Chen, 60, was arrested in connection with alleged abuses of 3.2 billion yuan ($400 million) of Shanghai's pension fund that has let Hu unleash the central government's largest anti-corruption campaign in decades against political and business leaders in a city that has been notably immune from Beijing's periodic crackdowns on corruption that culled party officials across China.

The official Xinhua news agency said Chen is accused of seeking benefits for companies and relatives, and protecting people around him in a case that, Xinhua said, had "created an odious political influence". See " Shanghai's Top Official Falls".

Last summer, Beijing dispatched scores of investigators to Shanghai to uncover how a third of the city's 10 billion yuan pension fund had been loaned to a privately held investment company, Fuxi Investment, which is run by Zhang Rongkun, one of the city's most powerful businessmen and No. 16 on Forbes' 2006 list of China’s richest.

Even before Chen's arrest, the investigation had implicated two top government officials: Qin Yu, who until two months ago was Chen's personal secretary; and Zhu Junyi, head of the Shanghai Labor and Social Security Bureau. Zhu authorized the loan to Fuxi, which used it to buy the rights to operate a toll road. Wu Minglie, a top former official now heading a local government-linked real estate company called New Huangpu Group, had also been arrested earlier this month.

A campaign to undermine the Shanghai political base of old guard leaders in Beijing is of more than passing interest to multinationals and foreign investors. Shanghai is both foreign capital's port of entry into China as well as home to the country's capital markets.

China's most prosperous city has become a showcase of a tightly run but business-friendly bureaucracy. Multinationals such as FedEx, IBM, Suez of France and GE Plastics, part of General Electric, have made the city their Asian regional headquarters. While Shanghai's status as a magnet for foreign investment is unlikely to be dented by the scandal, the result will shift the balance of power in the city. An extensive reshuffling of local and regional party leaders as Hu prepares for the party congress in the coming months risks some upsets for investors with long-established relationships with local leaders.

The questions now for foreign investors are how much further Hu feels he needs to go for his own political purposes, and to what extent Beijing will use a pension-fund scandal in Shanghai to prep a national regulatory regime for China's unregulated and largely opaque management of public funds.

Local officials currently manage billions of dollars of these funds, a scope that creates an obvious risk of financial mismanagement or worse, funds getting directed to the pet projects of city and party officials and their friends.

All told, the Shanghai investigation has embroiled nine public companies, including Hong Kong-listed Shanghai Electric, the largest industrial equipment maker in China. Fuxi invested in Shanghai Electric before its Hong Kong IPO last year and was its second-largest shareholder, after the controlling shareholder, Shanghai city government. Shanghai Electric Chairman Wang Chengming and Vice Chairman Han Guozhang resigned two weeks ago after being detained for violation of unspecified party rules and regulations.

In a country where business still depends on government connections and where there are many a municipally owned companies, foreign investors in Shanghai and elsewhere may well need a new set of friends in high places.


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