2007 Corruption in Shanghai, China Delayed many construction projects

Sometimes corruption affects big plans of communities. I was reading a recent article about the new skyscrapers planned in Shanghai, China, and it mentioned that several projects were late due to a large corruption case in 2007.  Shanghai has always been in the news regarding corruption, and the Communist Party was formed in China partly due to the corruption of the reigning Nationalist Party in Shanghai in the early 1900's.   In this case, construction of major skyscrapers in Shanghai, China were delayed from 2007 because the lead architect named Chen Liangyu committed pension fund corruption, which delayed building completion by 2+ years.  According to the Wall St. Journal, "Giant construction projects got funded from public coffers; choice assets moved out of state hands in elaborate transactions; and plum contracts went to the well-connected."

It seems that in the Chinese system, top communist officials like the architect have immense power and run things the way they want.  Well, that caught up with them and many projects were delayed.

"A subway expansion under way has been called into doubt, as has privatization of a water utility. Museum projects, including a Shanghai branch of France's Centre Georges Pompidou, are held up, as is approval for a Saks Inc. store on the classy waterfront district known as the Bund. The city has put on ice a campaign to lure a Walt Disney Co. theme park and a plan for the world's tallest Ferris wheel, officials say. Saks says it has pushed back the planned opening of its store to 2009 from 2008, while Disney says its China strategy is broader than a Shanghai theme park."

The scandal is a reminder of the role corruption long played in Shanghai's history. Though the city was famed early last century as the East's richest banking center, and opulent Art Deco buildings sprang up on the Bund, government-tolerated opium and prostitution rings also earned the city the label Whore of the Orient. Its very name came to stand for trickery, as in getting "shanghaied" into working on a ship. The Communist Party was founded in Shanghai and rose partly on a wave of resentment against the corruption of the ruling Nationalists.

vj

From the WSJ Real Estate Archives

Corruption Crackdown
Targets Shanghai Inc.

by James T. Areddy
From The Wall Street Journal Online
February 07, 2007

With its gleaming towers and explosive growth, this city has helped inspire dreams of a China century. Governed for four years by a British-educated architect named Chen Liangyu, Shanghai exuded a can-do attitude that welcomed foreign investment and showcased China's emergence on the world stage.

But underneath the boom and glitter, Communist Party leaders in Beijing say, lay a secret: massive corruption.

Last fall, the party fired Mr. Chen, alleging mismanagement and theft at a city pension fund, influence peddling and other misdeeds. It detained him at an undisclosed location. There, he has made no public comment.

See some of the buildings involved in the pension fund mismanagement in Shanghai over the past several years.

The fall of Mr. Chen, who not only ran the city but sat in China's ruling Politburo, was China's biggest political shakeup in a generation. But more than the ouster of one official, it amounted to an indictment of the business model known as Shanghai Inc.

Key to that model, according to company and government statements: Giant construction projects got funded from public coffers; choice assets moved out of state hands in elaborate transactions; and plum contracts went to the well-connected.

The crackdown is a reminder that China's system leaves great power in the hands of local Communist leaders, whose decisions can ripple unchecked through the economy. Now that the party has stepped in to take its Shanghai leader out of action, approval for the flashy big development projects for which Shanghai is famed has slowed to a crawl.

The party, which says its biggest threat is corruption within its ranks, has sent investigators sniffing for official graft in other Chinese cities as well. The Chinese have a saying: Kill a chicken to scare the monkeys. Mr. Chen's ouster is a reminder to local leaders, as well as to foreign investors, that roaring Shanghai-style growth is no longer Beijing's priority. If officials elsewhere take Mr. Chen's fate as a warning, one result could be to tap the brakes on China's booming economy. That would bolster a goal of moderation that Beijing has so far pursued to limited success by jawboning and curbing bank lending.

Mr. Chen's post as party secretary for Shanghai gave him vast power: control over 45% of the city's industry, from manufacturers to banks and property developers. The portfolio reflects the Communist Party's core position in Chinese business. A party-appointed secretary sits at the helm of many business groups in the country, including some joint ventures with foreigners.

In Shanghai, party officials all answered to Mr. Chen. After his September ouster, dozens fell along with him, from a pension-system chief to a mutual-fund executive to Mr. Chen's son and brother-in-law. The detentions have placed power in the hands of officials who are extra-careful in granting licenses and making other approvals needed to do business in Shanghai, say investors.

A subway expansion under way has been called into doubt, as has privatization of a water utility. Museum projects, including a Shanghai branch of France's Centre Georges Pompidou, are held up, as is approval for a Saks Inc. store on the classy waterfront district known as the Bund. The city has put on ice a campaign to lure a Walt Disney Co. theme park and a plan for the world's tallest Ferris wheel, officials say. Saks says it has pushed back the planned opening of its store to 2009 from 2008, while Disney says its China strategy is broader than a Shanghai theme park.

The 60-year-old Mr. Chen was fond of tennis, and a few years ago, Shanghai spent $300 million to build an arena to host the Tennis Masters Cup. Future tournaments are uncertain without their No. 1 fan: Mr. Chen.

Shanghai still has plenty of sizzle. For 2006, it reported its 15th straight year of double-digit economic growth, 12%. But expansion in fixed-asset investment such as property development, while still robust at 11%, was far below the rate of two years ago.

And there are some signs the city is losing its legendary magnetism. The government recently gave permission to the northern city of Tianjin to adopt looser foreign-exchange regulations, not to the traditional banking center of Shanghai. Some foreign developers say it makes sense now to seek opportunities in other Chinese cities rather than Shanghai.

The scandal is a reminder of the role corruption long played in Shanghai's history. Though the city was famed early last century as the East's richest banking center, and opulent Art Deco buildings sprang up on the Bund, government-tolerated opium and prostitution rings also earned the city the label Whore of the Orient. Its very name came to stand for trickery, as in getting "shanghaied" into working on a ship. The Communist Party was founded in Shanghai and rose partly on a wave of resentment against the corruption of the ruling Nationalists.

Decades later, the city was identified with Mao's Cultural Revolution and then the policies of "capitalist roader" Deng Xiaoping. Mr. Chen arrived in Shanghai as its transformation to a futuristic city was beginning. After studying architecture at an army institute, he joined the Communist Party in 1980. It put him in charge of Shanghai Electric Group Co., a massive machinery maker sometimes called China's General Electric. Later, his party jobs included overseeing sports programs, old cadres' retirement and transforming the historic Bund district.

Mr. Chen was allied with Shanghai party secretary Jiang Zemin, one of the pioneers in opening Shanghai to foreign investment. When Mr. Jiang vaulted to Chinese president, a string of Shanghai leaders followed him to national office, enabling Mr. Chen to move up the ranks in Shanghai.

In 1992, Mr. Chen cut short a course in public policy at England's University of Birmingham to accept a promotion back in Shanghai. After a tour as mayor, he ascended in 2002 to the top party post in eastern China: Shanghai party secretary.

Tall, brainy and confident, Mr. Chen fit the part of a big-city boss. He conveyed a populist persona by riding the subway to work and having his spokeswoman hold regular news conferences, a first for a Chinese city.

As foreign money poured in, the city's economic engine seemed to be firing on all cylinders. Companies blazed their logos in neon along the riverfront. Magazine covers touted the skyline as a symbol of the new China.

Behind the scenes, the boom appeared less spontaneous. Mr. Chen's government was seeding big projects from its own coffers and steering city pension funds into deals, according to official reports and people close to the matter.

Records show that to complete a 60-story Marriott hotel, featuring a triangular top and a Ferrari dealer at its base, the city used pension money despite China's prohibition on doing so. And in order to clear swaths of riverfront for still more apartment towers, the city government spent $1.7 billion to relocate its container handling docks to a distant island.

Public works got increasingly grandiose. In 2003, shortly after Mr. Chen revealed a passion for classical music, the city hoisted a 1930s opera house off its foundation and moved it 215 feet to a better location.

When Shanghai bid to be a host city for Formula One auto racing, Mr. Chen's brother-in-law took charge of building a billion-dollar track. The circuit was "unquestionably the finest in the world," marveled 27-time Grand Prix winner Jackie Stewart, who added that "no democracy could afford this."

The city government also sold assets in murky deals, according to brief stock-market disclosures and other official sources. In late 2004, Shanghai's State Asset Bureau sold 8% of Shanghai Electric, the $4.25 billion machinery maker Mr. Chen once headed. The local government also sold 20% of Hua An Fund Management Co., a mutual-fund group that manages $4.3 billion of assets.

The city gave no values for the deals or reasons for doing them. But according to the companies, the buyer in each case was a man named Zhang Rongkun, who earlier in 2004 had also built a toll highway to the Formula One track. Forbes estimated the obscure 33-year-old's worth at $605 million.

But tension with the central government was growing. The first signs of it had already arisen in 2002, soon after a new generation of officials with few Shanghai links rose to power in Beijing, led by President Hu Jintao and Premier Wen Jiabao.

As Shanghai continued to pour money into megaprojects that underpinned property and commodity costs nationwide, the disconnect with Beijing's leadership widened. When the central government imposed a national tax in 2005 to squeeze property speculators, Shanghai diluted it with local exemptions.

In the middle of last year, the government stepped up a crackdown on excesses. For instance, a vice mayor of Beijing was ousted in June for "corruption and dissoluteness" in his job, which included overseeing construction for the 2008 Olympic Games.

Mr. Chen appeared bulletproof. His mentor, former President Jiang, still pulled strings from his retirement, in a Shanghai compound so exclusive that the streets around it aren't on maps. But in August, just as the former president was enjoying a last hurrah with publication of his memoirs, investigators from the Communist-run central government and military began detaining Shanghai officials.

First came the chief of the city pension fund and then Mr. Zhang, the wealthy young purchaser of parts of two state companies, Shanghai Electric and Hua An Fund Management. He couldn't be reached for comment. Detained shortly afterward were Mr. Chen's longtime secretary and people who ran Hua An, plus heads of the Shanghai asset bureaus that sold the stakes in the companies.

Mr. Chen's brother-in-law, boss of the Formula One speedway, was detained. The Communist Party dealt with them in a time-honored method of party discipline, with detention as the first step in what is usually a secretive trial process.

On Sept. 25, the party stunned Shanghai by announcing that Mr. Chen himself was out. Besides pension corruption, said the state-run Xinhua news agency, Mr. Chen had committed "other discipline violations," such as "helping further the economic interests of illegal entrepreneurs," protecting colleagues who "severely violated laws" and aiding family members "by taking advantage of his official posts."

Mention of Mr. Chen quickly vanished from government Web sites. Within hours, Shanghai party members were summoned to a ballroom at a state-owned newspaper company, Wenhui-Xinmin United News Group. There, says a person who was present, party members heard more specific accusations: that Mr. Chen had channeled cash to his family, including $125 million in city pension money to his son, Chen Weili.

The son was a figure in sports, as deputy manager of the city's professional soccer club and publisher of China's Tennis World magazine. He was an official of a company that bought control of a city-owned developer with prominent projects on the Bund, including one with New York-based Rockefeller Group International Inc. The son, detained, couldn't be reached for comment. Rockefeller, a unit of Japan's Mitsubishi Estate Co., says its project has been unaffected by the case.

Several books quickly appeared, anonymously purporting to tell more of the story of the Shanghai leader's downfall, such as tales of alleged carousing and mistresses.

The investigation has especially chilled the property industry. Across the Huangpu River from the Bund, Japan's Mori Building Co. is barred from leasing space in a 100-story skyscraper it's building until the city government signs off on the tower's name, say people familiar with the project. The city's plans for a similar-size skyscraper next door are on hold.

Vincent Lo, a Hong Kong magnate who used to boast about his political connections, has warned investors that his company faces legal risks for accepting pension money to try to build a Shanghai version of Silicon Valley. In contrast to the U.S., China bars the investment of pension money in real estate, to keep retirees' money from being squandered in chancy projects.

Shanghai's mayor and acting party secretary, Han Zheng, says real-estate investors are still welcome. But now, extravagance is out, and "prominent use will be made of caps and ceilings" to control economic growth, he said in a recent address.

When the scandal broke, Mr. Lo of Hong Kong was in the midst of building the "Knowledge & Innovation Community," an ultramodern apartment and office complex adapted to high-tech tenants. Oracle Corp. and Cisco Systems Inc. called it Shanghai's version of Silicon Valley and agreed to help build it.

Among his financing: $190 million from the Shanghai pension fund. It had been funneled through Shanghai Pudong Development Bank Co., a local-government-run bank part-owned by Citigroup Inc., and masked as commercial lending, according to regulatory notices. Pudong Development and Citigroup had no comment.

Mr. Lo said he was returning the pension money and might be unable to finish the project but knew of no investigation targeting him. He replaced the pension money in part with a $113 million loan, but that came on tougher terms and needs to be repaid by March. Through a spokeswoman, Mr. Lo said he is arranging repayment and his projects remain on track. Oracle wouldn't say whether it remains involved. Cisco declined to comment on Mr. Lo's funding.

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