Beijing's graft inquiry reins in Shanghai 'clique'

With its rooftop turrets and fancy brickwork, the Moller Villa is a throwback to the Roaring '20s, when the treaty port of Shanghai, China, was a byword for speculative excess. Built by an Englishman, the Norwegian-style hotel now rents luxury suites to foreign bankers lured by the promise of China's new bull market.

But since August, when it abruptly closed its doors to the public for "refurbishment," a different kind of drama has unfolded behind its high walls. Investigators from the Communist Party's disciplinary committee have turned the hotel into their temporary headquarters as they probe a blossoming financial scandal that has already snared Shanghai's political boss and some of his closest business allies.

The fact that Shanghai has been tarred is no coincidence, say political analysts. The probe plays to the strengths of President Hu Jintao as he seeks to define his leadership and consolidate his power.

Mr. Hu is keen to marginalize opponents loyal to his predecessor, Jiang Zemin, who packed the party's ranks with officials from his powerbase in Shanghai.

Chen Liangyu, the party boss dismissed last month, was a member of this "Shanghai clique," and his removal could prefigure a wider purge ahead of a crucial party congress next year.

More arrests are expected to follow in what has become China's biggest graft case in a decade and a pressure point for reformers intent on curbing the cronyism shadowed by Shanghai's red-hot economy.

Last week, the party's central committee held a meeting on "building a harmonious society," the favored slogan for easing the tensions stoked by a yawning gap between China's haves and have-nots.

"The central government is giving a strong signal against corruption. We have to slow down, and we have to have equity before efficiency," says Larry Lang, a US-educated economist and former talk-show host in Shanghai.

Under Mr. Jiang, who retired in 2002, Shanghai rapidly regained its pre- communist reputation as China's most business-friendly and cosmopolitan city. Tax perks and 21st-century infrastructure brought in foreign investors, and urban redevelopment tied the architectural heritage of its past to a space-age vision of its future. Officials had a hotline to Beijing, which touted Shanghai as a showcase commercial city.

"Other provinces were jealous of Shanghai. They asked, how come they get so much support from Beijing?" says Zhang Jun, director of the China Center for Economic Studies at Fudan University in Shanghai.

That support is waning with the ascendancy of Hu and Premier Wen Jiabao, neither of whom have political ties to Shanghai. Their emphasis on social welfare and more equitable development is a shift from the go-for-broke growth that lit up Shanghai's skyline. China's rust belt northeast may be the beneficiary: Tianjin recently beat Shanghai in a bid to host an assembly line for European airplane maker Airbus.

More broadly, China's leaders are trying to rein in city and provincial leaders who increasingly thumb their nose at party directives on sustainable growth. Officials in Inner Mongolia Province were criticized this year for building a $365-million power plant without permission, then ignoring a direct order to stop its construction.

"It's not just about Shanghai. It's about the balance of power. If you look back in Chinese history, it's always a challenge for the center to deal with regions that have grown too powerful, wealthy, and independent," says Qin Shao, a history professor at the College of New Jersey in Ewing.

Mr. Chen, the disgraced party boss, hasn't been formally charged. State media have reported that he is accused of diverting city pension money to invest in risky private ventures, including a toll-road operator. Investigators have detained Zhang Rongkun, the owner of the toll-road company, who was last year named as China's 16th-richest man by Forbes magazine, along with other prominent politicians and businessmen.

Chen, who was Shanghai's mayor before his promotion to party secretary, had survived earlier graft scandals at city hall, gaining a Teflon reputation. When Mr. Lang, the talk-show host, began airing allegations in January of the misuse of pension funds, his show was pulled from state-run television. The official reason: Lang wasn't speaking in the correct dialect of Mandarin.

But the net quickly closed in on Chen after the arrest of the director of social security in August for alleged embezzlement. Last month he was dismissed from his post and suspended from the national Politburo.

Few details have emerged of how Shanghai's $1.2 billion pension fund was plundered. One sector of the economy that benefited, however, was real estate.

Property prices have skyrocketed over the past decade, as huge tracts of this densely packed city of 17 million people have been turned over to developers for urban renewal. Bulldozers have reduced old neighborhoods to rubble, ready to rise again as glass-clad condos.

This speculative real-estate boom has created winners – and losers. Among the latter are residents forced to move with minimal compensation to make way for the rich and connected, creating the kind of anger and resentment that is brushwood for the protests that China's leaders are struggling to contain.

In recent weeks, disgruntled property owners have gathered to vent their frustration, seizing on the pensions scandal to demand justice. A separate group of pensioners has also stepped up their campaign for better treatment.

"China's economic development is at a huge human and social price," warns Ms. Shao, of the College of New Jersey, who is writing a book on Shanghai's urban redevelopment. "Without a well-enforced legal framework to protect the powerless, the process has generated a great deal of grievances, and the center is feeling the pressure."

As Shanghai falls from favor, its buoyant economy may undergo a correction as more resources are redirected to China's poorer provinces. A ban on foreigners buying real estate is already cooling Shanghai's property market – though not the relocation of a further 18,000 households for construction ahead of the 2010 World Expo. Local businessmen are betting that whoever takes charge will want the city to keep growing.

Shanghai's boosters say that after the fuss dies down, its world-class infrastructure, strategic location, and hardwired capitalist ethos will prove hard to beat. "Once you remove the corrupt officials, Shanghai is still moving forward. It's in the blood. Shanghai people are entrepreneurs, and you can't take that away," says Lang.