Corruption Case of the Decade

Graft and cronyism tied to illicit loans from a Shanghai pension fund brought down the political hierarchy and a billionaire businessman.
By Caijing staff

Ademoralizing truth emerged after investigators spent nearly a year sorting out details of Shanghai's worst corruption scandal: Chen Liangyu, once the highest ranking Communist Party official in China's largest city, was far more crooked than anyone had imagined. Investigators concluded in a final report in September 2007 that a government funds racket spearheaded by Chen - who rose through the ranks to become a prominent mayor, eloquent party boss and role model for a generation of local officials - had thoroughly betrayed the party and his public office. The scandal was the biggest corruption case in the decade.

The revelations stunned Chen's elderly parents as well. When visited by a reporter in the family's Shanghai apartment, the 86-year-old father grimly held a newspaper story headlined "China's Central Commission for Discipline Inspection Answers Reporters on Chen Liangyu's Serious Violation of Principles," and sadly admitted, "We know nothing more."

The party's discipline commission charged Chen with abuse of power, nepotism and accepting millions of yuan in bribes. The charges followed his political dethronement and detention in the fall of 2006, which was followed by a formal expulsion from the party and government in the summer of 2007. The procedures led to a major overhaul of the Shanghai government leadership. Investigators found through exhaustive interviews and document reviews, the party secretary was instrumental in steering billions of yuan from the city's pension fund into highway and business projects of close associates.

Sharing the celebrity-of-shame spotlight with Chen was well-heeled tycoon Zhang Rongkun, a billionaire businessman who was listed as China's 16th richest person in 2005 by Forbes magazine - before the scandal disqualified him from the ranking the following year. More than 20 other players were implicated in the scandal, including Chen's son Chen Weili, mayoral aides, power brokers, cronies and market rainmakers. Investigators found that the corruption operated around two platforms, the Shanghai Pension Fund and Shanghai Electric Corp. Officials at both institutions swapped cash for power and favors. The web of corruption was so widespread that judicial officials decided to divide the trials, which began in fall 2007, among three jurisdictions in Shanghai, Jilin Province and Anhui Province.

The trials began in June and picked up steam as China prepared for the party's 17th National Congress in October. The speed of the legal process underscored the party's highly touted efforts to root out corruption in government and among its own ranks. Cai Zhang, chief justice of the Jilin Provincial People's Supreme Court, told Caijing that Beijing authorities at the highest levels of the party and People's Supreme Court decided that preliminary trials would be held in intermediate courts, and final decisions would be made by high courts at the provincial level.

Justice Meets a Party Boss and His Cronies

Chen Liangyu scaled the political ladder from the party chief of Shanghai Huangpu district to Shanghai mayor and party secretary before entering the powerful Politburo. His downfall was covered in detail by the official Xinhua news agency, which said Chen was guilty of:

- Supporting the Shanghai Labor and Social Security bureau in doling out pension funds to unlawful entrepreneurs and related companies, thus jeopardizing the funds.
- Helping businessmen illegally acquire rights to buy shares in state-owned enterprises, causing substantial losses in state assets.
- Abusing his positions and influence to secure profits for relatives, friends and aides while approving projects, misallocating resources, unfairly recruiting businesses and making unlawful decisions for land-use applications and official appointments.
- Helping relatives illegally profit from businesses.
- Using his position to secure sexual favors.
- Protecting aides and associates who committed serious discipline violations.

But investigators say Chen was not alone in weaving a web of deceit. Also targeted was Zhu Junyi who, as director of the Shanghai Municipal Bureau of Social Security, worked with Chen by funneling pension funds into illegal investments.

First in line at the receiving end of the pension cash flow was billionaire Zhang, who was questioned early in the probe for his role as president of tollway owner Fuxi Investment Holdings Co..

Investigators uncovered seven instances of pension-fund embezzlement between 2002 and '04 involving 3.45 billion yuan ($466 million). The funds were illicitly loaned through a trust to Zhang in his capacity as Fuxi's president.

Investigators said Fuxi borrowed billions from the Shanghai branch of the Industrial and Commercial Bank of China, which managed the pension fund. The cash allowed Fuxi to win control of about 200 kilometers of Shanghai tollways, including sections of the Shanghai-Hangzhou and the Jiading-Jinshan "Super highways."

Appropriately, long before being nabbed by authorities, Zhang earned the nickname "Sighway baron."

Zhang's company was also involved in the shady restructuring of Shanghai Electric in 2004, investigators said. Fuxi allegedly borrowed money from the electric company and used that cash to buy a majority stake in the same business. The next year, the revamped electric company's IPO in Hong Kong raised even more cash.

Several investment firms and individuals with stakes in Shanghai Electric fell into disrepute as details of a web of illegal financial schemes came to light.

Chen's alleged wrongdoing has been connected to local officials who used their access to government funds to invest in Shanghai's hot real estate market. For example, Wang Zheng served as vice chairman of the Huawen Group, which allegedly borrowed 1 billion yuan ($135 million) from a Shanghai public annuity fund but, according to Caijing sources, returned the money after the pension fund scandal erupted.

Investigators said Huawen took control of the local property owner New Huangpu Group in two transactions that included buying a minority stake from a state agency. The deal gave Wang a springboard for Huawen's ambitions.

A complete picture of Chen's role in the web of bribery and embezzlement is expected to become clear when his trial begins. Until then, the only good news his elderly parents could expect from authorities was that, while in custody, their disgraced son was in good health.

Authorities expect the trials of Chen and his cronies to be completed no later than early 2008.