PENSION SCANDAL CLAIMS MORE; POLITICS AS USUAL

C O N F I D E N T I A L SECTION 01 OF 08 SHANGHAI 006957

SIPDIS

SIPDIS

DEPT FOR EAP/CM, INR/B AND INR/EAP
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, ALTBACH, READE
TREAS FOR OASIA - DOHNER, CUSHMAN
USDOC FOR A/DAS MELCHER, MCQUEEN
NSC FOR WILDER AND TONG

E.O. 12958: DECL: 10/26/2016
TAGS: PGOV PINR EINV ECON CH
SUBJECT: PENSION SCANDAL CLAIMS MORE; POLITICS AS USUAL

REF: A) SHANGHAI 6381, B) SHANGHAI 6344, C) SHANGHAI 5928, D) BEIJING 21533,
E) BEIJING 20986, F) SHANGHAI 4574

CLASSIFIED BY: Kenneth Jarrett, Consul General, U.S. Consulate,
Shanghai.
REASON: 1.4 (b),(d)
(U) Classified by Pol/Econ Chief Mary Tarnowka for reasons 1.4
(b) and (d).




1. (C) Summary: The Shanghai pension scandal, to date, has
snared some 50 business and political leaders, with the number
continuing to rise. Four of our well-placed contacts recently
took the view that the current investigation was not primarily
designed to clean up Shanghai--although that was a side benefit.
Rather, the campaign was intended to allow President Hu Jintao
to consolidate his authority. These contacts expected Executive
Vice Premier and Politburo Standing Committee Member Huang Ju
and acting Shanghai Party Secretary Han Zheng to escape
relatively unscathed, with Huang to retire at the 2007 Party
Congress and Han to move on to another, likely lateral position.
Our contacts expressed hope that a Hu Jintao protege would
backfill for Han, providing crucial access to top decision
makers. Meanwhile, they expected that Shanghai officials would
be less willing to take risks and that Shanghai generally would
assume a somewhat lower profile. End summary.




2. (C) Poloff met with Tongji University Professor and Shanghai
Chinese People's Political Consultative Conference (CPPCC)
member Frank Peng on October 20 and with Shanghai Municipal
People's Congress (MPC) Researcher Zhou Meiyan on October 25 to
discuss the fallout of the pension scandal that toppled Shanghai
Party Secretary Chen Liangyu. Separately, Pol/Econ Chief and
Econoff met on October 24 with JP Morgan China VP Andrew Zhang
who offered additional insights on the case, as did Carlyle
Group Shanghai Chief Representative Luo Yi in a meeting with
Pol/Econ Chief on October 27. Additional material has been
summarized from other discussions and local, Hong Kong and
international press.




3. (C) According to press reports, as of October 23, 50 people
were currently under investigation for possible involvement in
the Shanghai social security scandal that toppled Shanghai Party
Secretary and Politburo Member Chen Liangyu. The list (at para

SIPDIS
17 below) reveals a veritable "Who's Who" of Shanghai's top
political and business leaders and shows the scope of how deeply
the central government is reaching to root out corrupt and/or
recalcitrant leaders.



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Just an Old-Fashioned Bare Knuckle Political Brawl
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4. (C) Shanghai MPC Researcher Zhou Meiyan said that the
current pension scandal investigation had little to do with a
desire to truly clean up the party and much more to do with
President Hu doing away with his political opponents. Andrew
Zhang added that Hu's attack against Chen was based on political
calculations of rivalry, with the underlying convenience of a
corruption investigation. Zhou averred that Hu was not really
acting out of concern for the national interest, but was more
concerned with protecting his position, allowing that
consideration to govern his decision making. In this sense,
Zhou said, Hu was no different in his political ambitions than
former President Jiang Zemin. Zhou likened Hu's removal of Chen
Liangyu to Jiang's removal of Chen Xitong from office and said
the only difference was that Hu was able to provide better
window dressing than Jiang for carrying out his personal
vendetta in the form of an anti-corruption campaign.



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SHANGHAI 00006957 002 OF 008


Extent and Benefits of Corruption

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5. (C) Zhou and Andrew Zhang assessed that Chen was not guilty
of any large-scale malfeasance that would actually warrant his
removal. Zhang said from what he had heard, Chen had only
benefited by getting two small apartments in Shanghai and his
son receiving some compensation for facilitating business
relations, services which he claimed would have been considered
legitimate in other countries. Zhou believed that Chen's
personal corruption was low by Chinese officialdom standards.
The biggest mistake Chen made--and the technical reason he had
been removed--was that he had violated a central regulation
forbidding investing pension funds in private companies. Luo,
however, said Chen was definitely corrupt, and noted he had
mistresses and a son out of wedlock. However, he said the
corruption was also what made him effective and was the
lubricant that kept things running smoothly in Shanghai. Luo
said that for Chinese businessmen, corrupt officials were better
than most of the regular bureaucrats since they were willing to
make decisions and take risks -- for a price. He said Shanghai
could appear clean to foreigners -- as it did to Carlyle --
since it was keeping the wheels greased off deals with local
businesspeople. (Comment: Zhou and Zhang's apparent sympathy
for Chen is not a mainstream view. There is little indication
that ordinary Shanghainese feel remorse over Chen's downfall.
And we have seldom heard criticism of the action even from
members of the Shanghai elite who would understand that Chen's
principal sin was probably political, not economic. End
Comment.)




6. (C) According to Zhou, although Chen's family and
subordinates apparently prospered from the arrangement with Fuxi
Investment Holdings, the pension fund investments actually made
excellent returns. In fact, Shanghai was able to promise its
retirees a higher rate of return than other provinces. While
rich coastal provinces approved of Chen's methods, hoping to
implement similar programs, poorer, inland provinces began
complaining to the central government that Beijing should give
them subsidies to allow them to offer better pension returns to
their residents as well. In turn, Hu and Wen accused Chen of
creating disturbances and undermining the construction of a
"Harmonious Society."



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Character and Honor at Stake

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7. (C) Zhou said all of this pointed to the fact that Hu was
using this "scandal" as a pretext to remove Chen, who was a
political thorn in his side. Frank Peng said that Chen had been
singled out for investigation for at least two reasons. First,
Chen was part of former President Jiang Zemin's network and
served as a high-profile target to establish President Hu
Jintao's dominance of the political system. Peng said he had
heard that Jiang's son, Jiang Mianheng, had been implicated in
the pension scandal and that the information the investigation
had turned up had been used to help persuade Jiang to criticize
Chen. Andrew Zhang said that Jiang had "traded" Chen Liangyu to
protect a family member-- a nephew of his wife --who was facing
political problems. Zhang also said Chen's ouster effectively
demonstrated that Hu had managed to marginalize Jiang, who only
retained a limited senior advisor role.


8. (C) Luo said he had heard that what originally got Chen in
trouble was trying to interfere with the Zhou Zhengyi real
estate scandal investigation by calling for a meeting with the

SHANGHAI 00006957 003 OF 008


chief investigator and saying that the case should be handled in
Shanghai. The investigators left Shanghai but reported to
Beijing that the only reason Chen Liangyu would be so concerned
was because he personally had something to hide. This resulted
in initiation of an investigation of Chen. When Chen stood up
publicly to Hu Jintao and Wen Jiabao resisting macroeconomic
controls in 2004, the investigation intensified. Luo said
according to several of "the kids" (sons and daughters of senior
party leaders with whom he associates in Beijing),the need to
do something about Chen now became critical because otherwise he
would have been on track for promotion to the Standing Committee
next Spring. According to an internal book on Chen's offenses
that Luo had heard about, two of the worst involved disparaging
the character and honor of President Hu. Apparently, Chen had
ridiculed a photo taken of Hu in Tibet wearing a helmet to deal
with protestors, saying that Hu wasn't anywhere near the front
line and if he still needed a helmet, he wasn't fit to govern
the country. In another instance, Chen had criticized Hu for
not visiting his mother's grave himself, but rather sending his
son as a proxy. Luo said it would have been unbearable for Hu
to have had Chen in the Standing Committee when he was saying
things like this behind his back.




9. (C) Frank Peng commented that the real reason for Chen's
demise was arrogance. Chen continued to infuriate both Hu and
Wen with his recalcitrant attitude and refusal to fall in line
with central policy. Peng noted, for instance, that Chen had
refused Wen Jiabao's directive that Shanghai pony up more of its
tax revenue to Beijing to support the 2008 Olympics on the
grounds that Shanghai was itself preparing for the 2007 Special
Olympics and the 2010 World Expo. Chen had (mistakenly)
believed himself untouchable due to his relationship with Jiang
and thus believed he was able to challenge on policy issues,
according to Zhou.




10. (C) Further demonstrating the political nature of the
current investigation, Peng pointed out that Statistics Bureau
Commissioner Qiu Xiaohua had gotten on Premier Wen's bad side.
Qiu had fallen out with Wen over the Premier's calls to rein in
the economy through macro controls. Although he hesitated to
say that Wen had removed him solely because of political
grievances, Peng noted that Qiu's replacement, Xie Fuzhan, the
former Deputy Director of the State Council Development Research
Center (DRC),was seen as close to Wen, as was the DRC Director.



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How High Will it Go?
--------------




11. (C) Our contacts for this message offered no predictions on
when the current investigation would end. They did not believe
there would be another Politburo-level victim. Frank Peng said
that Hu had little reason to move the investigations upwards
since there were no high-level leaders left who opposed him.




12. (C) According to Peng, Politburo Standing Committee Member
Huang Ju was "definitely tied" to the pension scandal and Hu and
Wen were currently deliberating how to handle the issue. Peng
assessed that Huang would stay on in his current positions until
the 2007 Party Congress when he would definitely retire. (Note:
Peng again insisted that Huang did not have pancreatic cancer
but had already recovered from a pancreatic infection. End
note.). Zhou Meiyan said that Hu and Huang had reached an
"agreement" that Huang himself would not be touched (although
his wife was apparently not part of the bargain),and in return,
Huang would not offer any resistance to Hu's attack on Chen or
to Hu's policy agenda.


SHANGHAI 00006957 004 OF 008





13. (C) Zhou also said it was unlikely that acting Shanghai
Party Secretary Han Zheng would be sacked over the scandal.
Han, Zhou assessed, had successfully been able to distance
himself from Chen, as evidenced by official press reports
lauding Han as a "good cadre" whom the central leadership had
faith in. Zhou said that Han had been implicated in the
investigation, with Zhang adding that he also had a mistress,
but had kept his job by "shooting Chen Liangyu in the back."
Han would be allowed to keep his job as essentially a caretaker
until the 2007 Party Congress or 2008 People's Congress, and
would then retire or be "promoted" into an unimportant job
somewhere else, according to Zhang. Luo said Han was also
corrupt, although perhaps not to the same degree as Chen, and
was not likely to be kept around for long.




14. (C) Luo said the scandal had everyone nervous. He said he
was having breakfast with several of "the kids" the morning that
Chen Liangyu's removal was announced -- just before the official
announcement was made. Luo said the scandal investigation was
the elephant in the room that no one talks about. He said all
the kids "on both sides" were keeping their noses clean, staying
out of trouble and avoiding business deals.



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Blow to Shanghai's Image
--------------




15. (C) Andrew Zhang concurred with some other Consulate
contacts, including Shanghai MPC Legal Affairs Commission
Director Shen Guoming (Ref B),in stating that the recent
scandal did not mean that Shanghai was more corrupt than other
areas of China; he believed it was relatively cleaner. Zhang
said "real" anti-corruption investigations were going on
elsewhere in China; this one was political. Frank Peng was
optimistic that the overall impact of this investigation would
be to leave Shanghai a cleaner city than others in China in the
long-run, and a better place to invest. Peng said that because
Shanghai was still a central part of the national development
strategy, it would probably retain its Politburo seat. He said
that either Organization Department Director He Guoqiang or
Liaoning Party Secretary Li Keqiang (both Hu protigis according
to Peng) was likely to take over the Party Secretary position in
Shanghai along with the Politburo slot. Zhang and Luo, however,
believed that that the scandal would have damaging consequences
for Shanghai. As long as Han was Party Secretary, there would
be no real advocate for Shanghai's interests and Shanghai
officials would be reluctant to take risks. When Han was
finally replaced--even if it was with a successor hand-picked by
Hu--it would take time for the successor to get up to speed and
have a new team in place. Our contacts expected Shanghai to
assume a somewhat lower profile at least in the near-term.



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Additional Local Leadership Changes Underway
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16. (SBU) PRC-connected Hong Kong press first reported several
personnel changes underway, later confirmed by Mainland press,
and not necessarily related to the pension scandal. On October
26, Hong Kong-based Ta Kung Pao reported that Jiang Sixian,
Chief of the Shanghai Organization Department, Shanghai
State-Owned Assets Supervision and Administration Commission
(SASAC) Party Secretary, and a Shanghai Standing Committee
Member (and tennis partner of Chen in July, ref F) was
transferred to Hainan as a vice governor, although he was not
named to the Hainan Provincial Standing Committee. The article

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speculated that given the involvement of two of Jiang's
subordinates in the pension scandal, Jiang's reputation was
tainted and he would likely remain under investigation. The
article predicted that Jiang would be replaced by Shanghai CPC
United Front Director Shen Hongguang, and that if Shen was
promoted, Vice Mayor Yang Xiaodu, who had worked in Tibet from
1977 to 2001, would likely take his place. (Note: Shen's resume
would have put him in Tibet when Hu Jintao was serving there in
the late 1980s. End note.) The article also said that if Shen
moved up, Shanghai Government Secretary General Ms. Yang Dinghua
would be the likely candidate to replace him. As of October 27,
Jiang was not listed on the Hainan Provincial Government's
website, www.hainan.gov.cn, but he was also no longer listed on
the Shanghai Organizational website (www.shjcdj.org.cn). An
October 26 Sina report confirmed that Shen replaced Jiang as
Organizational Department Chief. October 27 Xinhua and
news.21cn.com reports confirmed that Yang Dinghua replaced Yang
Xiaodu as Vice Mayor, and that Yang Xiaodu had been appointed
United Front Work Department Director, succeeding Shen.



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Programs! Can't Tell the Players Without a Program

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17. (C) Chen Liangyu, detained on September 24 after being
called back to Beijing. Chen's case is currently under
investigation by the Central Discipline Inspection Commission
(CDIC). According to Andrew Zhang, Chen has a mistress in
Beijing who works for the Ministry of Finance who, as of yet,
has remained untouched by the investigation.



- Zhang Rongkun, Chairman of Fuxi Investment Holdings and a
CPPCC member, was placed under investigation July 24, removed
from the CPPCC on October 16, and arrested on October 21,
according to Sina and Radio Free Asia. According to Hong
Kong-based Oriental Daily, during his investigation, Zhang is
said to have provided a name list of 20 officials he bribed, as
well as a cache of sexually explicit and compromising videos he
had taken of many of these officials.



- Wu Minglie, President of the New Huangpu Group, a real estate
development company, and Shanghai MPC delegate. According to
Oriental Daily, the CDIC launched an investigation into Wu on
September 2 for embezzlement of the government's
"extra-budgetary funds," including social security funds. He
was removed from his MPC seat on September 29, according to
press reports. Hew Huangpu was founded in 1994 by Chen Liangyu
and is involved in a number of construction projects related to
Shanghai's hosting of the World Expo in 2010. According to
Frank Peng, Wu was nicknamed "Chen Liangyu's Wallet." He said
that Wu paid 1.56 million RMB in "traveling fees" to subsidize
Chen's wife and son on a recent visit to the United States. Wu
also provided a 149 square meter home to Chen's father in 1998.



- Zhu Junyi, Shanghai Bureau of Labor and Social Security
Director and Shanghai delegate to the National People's Congress
(NPC). According to People's Daily, Zhu was removed from his
Shanghai position on August 9 for suspicion of bribery and
misuse of pension funds; his NPC duties were terminated on
August 11. Zhu reportedly loaned between 3-7 billion RMB from
Shanghai's pension funds to Fuxi Investment, which used the
funds in part to build the Shanghai-Hangzhou Expressway.
According to Zhou Meiyan, although Zhu made significant returns
on the investments, all of which went back into pension
payments, he was in violation of central government regulations
forbidding the investment of pension funds into private

SHANGHAI 00006957 006 OF 008


companies. In an October 18 conversation with the Consul
General, National Council for Social Security Fund Vice Chairman
Gao Xiqing said that Shanghai's use of pension funds in this
manner violated central government regulations, but acknowledged
that the regulations were imprecise and generally unenforced.
Zhu was also the subject of at least one of Zhang's videos,
according to Hong Kong Oriental Daily press reports.



- Qin Yu, District Mayor of Shanghai's Baoshan District and Chen
Liangu's former secretary (mishu). Xinhua reported on August 24
that Qin had been found to have seriously violated disciplinary
regulations and was thus under investigation. Qin was another
of the subjects of at least one of Zhang's compromising videos,
according to Hong Kong Oriental Daily press reports. He was
also the recipient of generous bribes Zhang paid to gain access
to Chen, according to Zhou Meiyan. Zhou said Qin had received
enough money to purchase five homes throughout Shanghai.



- Yu Huiwen, wife of Huang Ju and Vice President of the Shanghai
Charity Foundation. Yu had been detained and is under "Double
Designation" (shuang gui) restrictions (ie, she must attend
questioning sessions at a designated place and for a designated
duration) pending completion of the investigation against her,
according to Zhou Meiyan. According to Hong Kong Ming Pao, the
Shanghai Charity Foundation has acted as a facilitating body,
allowing wealthy businesspeople who make donations the
opportunity to meet Yu and influential leaders in her husband's
circle. Zhang Rongkun was also an honorary vice president of
the Foundation.



- Huang Xi, Vice President of the Pudong Development Group and
Huang Ju's younger brother. According to Hong Kong Ming Pao,
Huang is being investigated by the CDIC for his ties to Zhang
Rongkun.



- Chen Liangjun, Chen's younger brother. A businessman, Chen
Liangjun reportedly received favorable business deals from Zhang
Rongkun as a result of his brother's cooperation on pension fund
investments into Fuxi Investment. Chen had been detained and
was currently subject to the shuang gui restrictions, according
to Zhou Meiyan.



- Qiu Xiaohua, Commissioner (aka Director) of the National
Bureau of Statistics and CPPCC member, was removed from his
position on October 19 after it was revealed that he was being
investigated for his possible role in the pension scandal,
according to Xinhua. Qiu had only held the position since March.
Although Qiu had never served in Shanghai, press reports claim
that Qiu met Zhang Rongkun through the CPPCC. According to
Boxun News, Zhang reportedly took an interest in Qiu because of
his access to senior leaders and brought Qiu to Shanghai for a
"vacation" where Zhang introduced him to a woman who reportedly
became Qiu's mistress. Neither Zhou Meiyan nor Frank Peng knew
of any direct tie to the pension scandal.



- Wang Chengming, Chairman and Party Secretary of the Shanghai
Electric Group and member of the Municipal People's Congress
(MPC). Wang was placed under investigation by the CDIC on
August 13, according to Xinhua. He was removed from his MPC
post on September 28.



- Han Guozhang, Vice President of Shanghai Electric Group.
According to China Securities and Beijing-based The Economic
Observer, the CDIC began investigating Han on August 2 and took

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him to Nanjing for questioning. Sina and Xinhua report Han was
suspected of accepting bribes and embezzling money from a
company-financed retirement fund for former employees. That
fund was managed by the Municipal Labor and Social Security
Bureau and is believed to be related to the sacking of Zhu Junyi.



- Xu Wei, Chairman of Shanghai Electric Group's Board of
Directors, and Shanghai Electric Group's Deputy Director of the
Investment Management Department was placed under "double
designation" restrictions, according to an October 19 Xinhua
report. Andrew Zhang noted that China's power grid was "owned"
by former NPC Chairman Li Peng's family members.



- Sun Luyi, Shanghai Deputy Party Secretary and General Office
Director. On September 28, Sun was "asked to assist" in the
pension scandal investigations, a euphemism for being placed
under investigation, according to Xinhua. According to an
October 3 article from the 21st Business Herald, Sun was
suspected of accepting bribes from Zhang Rongkun, and was one of
the 20 people on Zhang's list of bribed officials.



- Han Fanghe, General Manager of the Hua An Fund Management
Company, Ltd. The October 13 Economic Observer said that Han
was under investigation for "serious violation of disciplinary
regulations." Although not much is available about Han's case,
it is rumored that he used the pension funds to complete the
management buy-out of Hua An. Hua An is owned in part by an arm
of Fuxi Investment and the Shanghai Electric Group.



- Yu Zhifei, General Manager of the Shanghai International
Circuit and "China's Godfather of Formula One Racing."
According to Shanghai-based Oriental Morning Post, Yu was
detained by the CDIC on October 14. Although details of the
case remain sketchy, Yu supposedly became close to Chen Liangyu
while serving together in Shanghai's Huangpu District Government.



- Ling Baoheng, Director of the Shanghai SASAC, and his deputy,
Wu Hongmei. Shanghai official press Eastday.com reported on
October 24 that both Ling and Wu were "assisting in the
investigation" of the pension scandal.



- Zhou Yupeng, Shanghai Vice Mayor. According to Hong Kong Ping
Kuo Jih Pao, Zhou is under investigation for his role in
approving the 3 billion RMB in loans made by Zhu Junyi to Zhang
Rongkun.



- Yu Guoxiang, Chairman of the Board of the Ningbo Xinhengde
Real Estate Company, Ltd. According to Hong-Kong based Sing Tao
and Xinhua, Yu was close to Chen Liangyu and had used Shanghai
pension funds to purchase 90 percent of the shares in the
Shanghai Ling-an Hilton International Hotel. The investment was
worth USD 150 million.



- Wu Zhiming, Director of the Shanghai Public Security Bureau,
and Xin Jude, Director of the Shanghai People's Armed Police
were implicated in the scandal and were reportedly removed from
their posts just prior to Chen Liangyu's ouster (Ref A).
However, both Wu and Vice Mayor Zhou Yupeng were reported by
Tokyo press Tokyo Shimbun to have attended National Day
celebrations on September 30.



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- Xu Jianguo, Director of the Shanghai Economic Commission,
Shanghai No. 1 Intermediate Court Chief Judge Bao Xianming, and
Shanghai Maritime Court Deputy Director Shen Mantang were fired
from their positions due to involvement in the scandal,
according to a Xinhua report.



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Cases to Watch
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18. (SBU) Although there have been no direct links drawn to the
pension scandal, Xinhua reported on October 25 that two China
Eastern Airlines deputy general managers, Wu Jiuhong and Tong
Guozhao, were being investigated by the CDIC and SASAC. In
addition, five people, including General Manager of China
Eastern's Freight Transport Department Xiao Qixian and Deputy
General Manager of Air Cargo Wang Qiang, were detained by the
Shanghai Changning District Procuratorate for possible
bribe-taking in August. Xiao's subordinate, Wu Sheng--Wu
Jiuhong's former secretary--was also called in for questioning.
Also, in July, the CDIC launched an investigation into Wang
Wulong, a vice chairman of the Jiangsu People's Congress,
although no details of the case have been disclosed, according
to press reports.
JARRETT