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Global Market Brief: Cleaning House in Shanghai - Stratfor

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  • Global Market Brief: Cleaning House in Shanghai - Stratfor

    iTulip.com uses Stratfor, and recommends Stratfor for individual and institutional investors who need timely, accurate global intelligence, analysis, and forecasting to make strategic investment decisions. Wherever you are investing around the globe–United States, China, Russia, India, Brazil–you need independent assessment of the dynamic economic, political, and security environment of the countries where you are active.

    Global Market Brief: Cleaning House in Shanghai (Subscription Required)

    September 29, 2006 (Stratfor)

    Summary

    Chinese President Hu Jintao "struck hard" at corruption with the sacking of Shanghai Communist Party Secretary Chen Liangyu. But in a nation where economic relations are based more on personal connections than legal frameworks, the shake up in Shanghai is just one of several steps Hu is taking. These steps ultimately will require foreign and domestic businesses to readjust their personal connections -- not with the local Party and government leadership, but with the central leadership in Beijing.

    Analysis (Excerpt)

    Chinese president Hu Jintao "struck hard" at corruption with the sacking of Shanghai Communist Party Secretary Chen Liangyu. Chen also lost his position as a member of the Politburo of the Central Committee of the Communist Party of China, the upper echelon of Communist Party leadership. Chen's removal was more than a blow against corruption, however; it was one of Hu's most significant steps fully to consolidate his power ahead of the 2007 Party Congress. But in a nation where economic relations are based more on personal connections than legal frameworks, the shake up in Shanghai, the power base of former President Jiang Zemin, is just one of several steps Hu is taking. These steps ultimately will require foreign and domestic businesses to readjust their personal connections -- not with the local Party and government leadership, but with the central leadership in Beijing.

    Shanghai, long the shining star of Chinese economic growth and prosperity, has seen its light dimming in recent years. Rising labor costs and increased competition from neighboring provinces have slowed the growth of manufacturing. At the same time, Shanghai has been unable to grab the top spot of Chinese finance, with Beijing playing host to the lion's share of banking and insurance companies. (In 2005, some 44 percent of China's financial assets were in Beijing, compared to just 10 percent in Shanghai.) Shanghai is no longer in the list of the top 10 fastest growing Chinese areas (gross domestic product growth fell from 15.1 percent in the first half of 2005 to 12.6 percent in the first half of 2006), and gross domestic product for the first half of the year amounted to less than half of that for Guangdong, Shandong or Jiangsu.

    While no longer in the lead, Shanghai remains a powerful draw for foreign investment, finance and industry (playing host to more Chinese headquarters of foreign companies than any other Chinese city aside from Hong Kong). And for two decades, Shanghai was the entry port for foreign capital -- and for building business connections with influential Chinese politicians. Former Chinese President Jiang Zemin and his premier, Zhu Rongji, both hailed from Shanghai, and their influence in the city continued after their move to Beijing through the so-called "Shanghai gang." Establishing good relations, or "guangxi," with these local officials was a sure way to win favor with the central leadership -- or at least to avoid the vagaries of Chinese economic policies and regulatory interpretations.

    [Section Reduced]

    Rising social unrest throughout 2004 and 2005 reminded Hu and his allies of the serious need to purge the Party (corruption and graft being a primary cause of the increasingly bold and violent but localized uprisings), but at the same time emphasized the fragile nature of Party rule. Hu shifted to a more theoretical and rhetorical attack on corruption, cleaning out the banking system and select officials and giving local and provincial officials time to adjust their actions to the new government priorities. Hu began calling for the transfer of funds, investment and manufacturing from the prosperous coastal regions to the interior in an attempt to redistribute wealth. He simultaneously embarked on a program designed to re-centralize economic coordination and control. This dual strategy was aimed at undermining the economic incentives that made local officials rich and greedy and led China down the path of unequal and redundant economic growth and development.

    As the Oct. 8-11 CPC Central Committee plenary session approaches, Hu has intensified his anti-corruption campaign, going for the heart of the Jiang networks. (The plenary session will lay the groundwork for the leadership shuffle at the Party Congress in 2007 and shape China's economic path.) On Aug. 11, Zhu Junyi, then-director of the Shanghai Municipal Labor and Social Security Bureau, was dismissed for lending some $400 million (a third of the Shanghai pension fund) to Fuxi Investment Holdings, which used the money to invest in a private toll road. Within days, Zhang Rongkun, China's 16th wealthiest man, was also detained for questioning. Zhang was chairman of Fuxi and vice chairman and non-executive director of Shanghai Electric. Next to fall were Wang Chengming, chairman and party secretary of Shanghai Electric, and Han Guozhang, executive director of Shanghai Electric.

    [Section Reduced]

    In other coastal cities, there will be a rapid reassessment of where local pension fund monies have gone, and a scramble either to find a way to make a political and economic accommodation with Beijing or to take the money and run. If Beijing is successful, a wave of mistrust and uncertainty will careen through the various personal political and economic networks, favoring those with closer relations to Hu and Wen and turning others toward the central leadership. But those who have made their fortunes in heady days of unrestrained investments and entrenched corruption, collusion and nepotism are not likely to take the assault from Beijing lying down. While some seek political accommodation and others seek a new house in Vancouver, a few are likely to fight back. Hu may have employed his own shock therapy in Shanghai but, as he moves to the even wealthier provinces, he might find some willing to hit back.

    Available for a limited time now via iTulip.com is the complete Global Market Brief and Stratfor's Q4/06 Global Forecast - not yet released to the public - PLUS unrestricted access to the exclusive Premium members-only area, for 30% off regular rates.
    Last edited by FRED; 09-29-06, 05:47 PM.
    Ed.
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