Booming Shanghai open for business - and graft


SHANGHAI, China -- Her hopes did not last long; but for a few days in June, Jiang Meili dared to believe that corrupt officials would be punished for their misdeeds here in China's capital of industry.

In a city that has lofty ambitions as an Asian business center -- and the deep-pocketed property speculators to go with them -- the businessman once believed to be the richest man in town, property and stock market tycoon Zhou Zhengyi, was in detention. Authorities were investigating him in connection with hundreds of millions of dollars of loans obtained from the Bank of China, according to state and Hong Kong news reports.

Zhou, 11th on Forbes magazine's list of China's wealthiest people, has torn down block after block of brick tenements, clearing the way for steel-and-glass skyscrapers and forcing low-income families who have lived in central Shanghai since before the revolution in 1949 to move to distant outskirts.

Zhou was helping to remake his hometown; and if he broke some rules and regulations along the way, government officials, for a long time, did not stop him.

That is because Zhou and the new Shanghai are creations of a distinctly Chinese brand of capitalism, where the winners and losers often are decided not by an open, transparent market but by a closed, opaque political system.

In China's evolving system of justice and in its evolving market economy, all things -- including the rules of the game -- are negotiable. Crackdowns on developers and the well-to-do can be less law enforcement than raw indicators of political power -- who has it and, more important, who has lost it.

So, when Jiang eventually learned of Zhou's detention, she had a brief glimmer of hope for change: A tycoon was under investigation, and maybe his detention would lead to charges against the officials who had protected him and profited from his dealings. Usually, she worried that authorities might instead arrest her husband, Zheng Enchong.

She and Zheng, a lawyer, had been kicked out of their old Shanghai building almost a decade ago by another well-connected developer. Zheng began working on behalf of evicted tenants. On May 30, he wrote an open letter to President Hu Jintao, signed by 12 of his clients, calling Zhou a "big swindler" and accusing Shanghai officials of corruption. Days later, they heard that Zhou had been taken into custody.

But on June 6, 11 days after the developer's detention, police picked up Zheng. He was accused of illegally acquiring "state secrets," a catch-all charge often used against dissenters in China.


And there are signs that the investigation of the developer may not go far enough to expose top officials. A banker has been cleared of approving improper loans to Zhou, and a Hong Kong newspaper has reported that central government leaders have agreed to limit the scope of the investigation.

"I was expecting that the Shanghai government would bring all those corrupt officials out from behind the curtain," said Jiang. "I had hope for that period of time, but right now, when I look back, I think it was not possible."

The rules of the game still favored the well-connected and the well-to-do.

For a quarter-century, China's economy has exploded as part of a chaotic transition from socialism to capitalism. Hundreds of millions of Chinese have risen from poverty. Many of the people who have benefited most, however, are corrupt officials and their relatives and friends who used public assets -- real estate, state-owned factories and banks, even government treasuries -- to build personal fortunes.

Private entrepreneurs had found themselves on unequal footing with state-owned companies. But they flourished by force of ingenuity, influence and, on occasion, by intoxication of official guests. With the right friends, entrepreneurs can get public land on the cheap or obtain the permits needed to open a restaurant. Without the right friends, they might not get a bank loan.

"It does happen that private entrepreneurs give kickbacks to bank officials to get loans," said Zhu Jiuhu, lawyer for Sun Dawu, a successful businessman in northern China and outspoken critic of official corruption who was charged last month with running an illegal bank. "Sun Dawu tried to apply [without kickbacks] for loans of millions each year, but he never got it. He applied for six or seven years straight, but he never got anything. ... It's very difficult for private enterprises to compete if they can't get loans."

Sun is another in a series of high-profile private entrepreneurs to be taken into custody in the past year. Qian Yongwei, another Shanghai real estate developer, was detained on the same day as Zhou, according to Caijing, an unusually aggressive Chinese business magazine. Last fall, authorities detained orchid and tulip grower Yang Bin and arrested carmaker Yang Rong, ranked second and third respectively on the 2001 Forbes list of China's rich, on allegations of economic crimes. Yang Bin was sentenced recently to 18 years in prison, while Yang Rong, who is not related, has fled abroad and may be in the United States.

Flow of power

The arrests and detentions might appear to reflect a Chinese government determined to punish lawbreakers even among the super-rich, appealing to a public that resents the advantages of the well-connected. Authorities have similarly sought to win public confidence over the years by arresting scores of local officials and, more recently, top bankers, in well-publicized anti-corruption campaigns.

But this is also part of the ebb and flow of power.

"I don't think anyone in this country can make hundreds of millions of U.S. dollars without some sort of political protection," said a senior diplomat in Beijing who has closely followed the government's anti-corruption efforts. Now, tycoons are being arrested for breaking laws most have flouted for years.

Yang Bin, for example, was under investigation for months before his detention on accusations of tax evasion, bribery and other economic crimes, but he may have lost much-needed political protection when he agreed last year to run a special economic zone in neighboring North Korea without first getting approval from Beijing. Yang Rong was locked in a dispute with government officials over control of a joint venture when he disappeared from public view in May of last year, months before he was charged in absentia.

Conversely, in Shanghai, analysts and aggrieved residents assert that city officials and their benefactors have gone unpunished for corruption over the years because the city is run by allies of former President Jiang Zemin, whose so-called "Shanghai gang" of top party cadres still exerts tremendous influence in the central government.

In anti-corruption campaigns dating to the 1980s, top city officials and tycoons from Beijing in the north to Xiamen in the southeast have fallen in major scandals, but never in this eastern port city.

Zhou Zhengyi was supposed to be part of Shanghai's protected class, a man whose close ties to top city officials served him well as he became the city's best-known entrepreneur.

It is unclear why that protection failed him, or even whether it did. The government generally keeps silent on investigations, and no political rationale for Zhou's detention can be found in the state news media, which, after initial stories, has been ordered not to cover the case. He was under house arrest for a time; his situation now is unknown. Some experts believe that he was the incidental victim of a larger Hong Kong-based investigation of loan irregularities at the Bank of China.

"There wasn't anybody who wanted to catch him," said Cao Siyuan, an economist and consultant in Beijing. "It's just that he happened to be exposed."

The rise, fall and now uncertain fate of Zhou have demonstrated to many that a corrupt culture persists. It is an embarrassment for a city that views itself as China's international showcase for commerce.

"Shanghai is famous in the world. If any small corruption is made public, it will produce big negative influence on Shanghai in the world," said Hu Angang, an economist in Beijing who has studied the costs of corruption and advised China's leaders on attacking it. "If it's a big corruption case, then very hugely negative. No investor likes to invest in a city of corruption."

This is the meeting place for Chinese business opportunities and billions of dollars in foreign investment. It is a rising rival to Hong Kong, but the difference is that here the biggest deals are sealed behind a communist red curtain.

"You are in the birthplace of Chinese capitalism," said Eva Ho, a public relations consultant and U.S. citizen who has returned to her native Shanghai. "On the one hand, you have a capitalist system; but on the other hand, you still have the [communist] political system."

Zhou was a beneficiary of both. He earned millions in the restaurant business, according to Chinese news reports, then amassed a larger fortune in the mid-1990s by buying shares of dozens of state-owned companies from workers who did not believe the shares would grow in value. It is unclear how he obtained the access to make those purchases or whether he had inside information about the shares' potential value, but the blueprint for Zhou's rise was clear enough: Buy state-owned assets cheap.

That also was the blueprint he was following in his redevelopment of the Shanghai blocks. He acquired large tracts of state-owned properties virtually for free, transactions that were legal under the condition that Zhou resettle residents in the developments he was building. When evicted tenants protested about their treatment and noted he got the development rights for free, a Shanghai newspaper printed an unusual story explaining how such deals were legal.

Many without a personal stake in the Zhou case are quick to point out that his favorable deals are little different from those of well-connected business leaders all over the world.

"Any discussion of corruption in business dealings in China has to be seen in the larger context of how business dealings happen in big cities anywhere in the world," said Christopher Choa, director of the Shanghai office of a New York architectural firm. "In China, there just happens to be a culture where there's an enormous amount that's negotiated. ... All the exceptions are negotiated, and virtually everything is an exception."

The feeding frenzy on public assets also may be the inevitable legacy of a country in transition from a controlled economy. In the 1990s, Russia was an economic playground for a small group of connected businessmen and leaders of criminal syndicates who have become that country's billionaire oligarchs.

In China, though, it is the Communist Party that has overseen this devolution of state property into private hands. The party has allowed officials to get rich and become the core of the business elite.

These new rich garner their fortunes with little fear of reprisal from a system they and their allies partly control. They have presided over the creation not of a true market economy, but of a homegrown substitute -- a gray economy.

The gray economy takes many forms, and in a perverse way it plays an important role in the country's development. Smuggling and piracy make foreign products affordable to a public that can't afford the genuine articles. Taking officials out to dinner, plying them with prostitutes or simply bribing them cuts through a mass of red tape. Kickbacks open the coffers of state banks to private businesses, while underground banks provide another conduit of cash for businesses and ordinary people. And sweetheart land deals and speculative loans are what make skyscrapers go up in Shanghai.

"Paying the right person is part of the deal, but that's entrepreneurism," Ho said. "I would rather see that than see people run into the big bureaucracy. Give people a chance."

Whatever China is doing, it is succeeding by many measures. Despite the huge advantages enjoyed by state-owned enterprises, private companies account for most of the country's economic growth and new jobs, which China badly needs to maintain social stability.

But as long as the titans of the gray economy prosper, so too will many in China lose out. To succeed, some of the new rich have embezzled from state-owned corporations and banks, bullied competitors into closing, exploited workers, bankrupted commoners at illegal casinos and forced tenants out of their old neighborhoods.

Some who have stolen or bullied their way to fortunes are not plowing that money back into China's future. Thousands have left for North America or elsewhere with billions of dollars. And the countless losers back in China have little recourse even if the law is on their side.

"Other people can see only the neon lights of Shanghai, but they don't know the sad stories behind them," said Shen Ting of Hong Kong, who is fighting for a better relocation deal for her elderly parents, evicted by Zhou to an apartment 30 miles away.

Shen, who was briefly detained in Shanghai for trying to appeal to authorities in Beijing, said some evicted tenants committed suicide, having given up hope for just compensation.

"People are always talking about how Shanghai will surpass Hong Kong as a city," said Shen, who retained Zheng, the lawyer, to help her parents. "I think that the infrastructure may surpass that of Hong Kong in the future, but the legal system is lagging far behind."

High hopes

Some in Beijing and in Shanghai's business circles hope Zhou's detention means the legal system is beginning to change. They say authorities are showing an interest in making the business of the city and the country cleaner and more transparent.

"This reflects new leaders' strong political will for anti-corruption," said Hu, the Beijing economist. "It's not only bad news. It's good news. ... They need to rebuild credibility in the world."

For now, authorities may have just as challenging a credibility problem at home, where Jiang awaits the outcome of the Zhou case and her husband's. She was discouraged by a letter Zheng wrote her recently, advising her to sell her younger brother's apartment and move in with him -- a sign that he expects a long prison term.

Jiang said her husband had been harassed by local officials for eight years, causing difficulties with his lawyer's license. She said he would never have attempted to take on corruption in Shanghai had he known it would send him to prison, and she had tried to stop him.

"I told him Zhou Zhengyi is a powerful person and [that] he can't carry on an anti-corruption campaign by himself," Jiang said. "He's just a little lawyer, and he was struggling with this kind of big powerful person. You can think up the result yourself."

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