The Gloves Are Coming Off In China

With Deng Xiaoping near death, Chinese President Jiang Zemin is looking for every opportunity to boost his stature. What better way than under the guise of a popular cause like cracking down on corruption? On Apr. 27, Jiang ousted a top rival, Beijing party boss Chen Xitong, who is being held responsible for suspect deals made by city officials. That came just weeks after the suicides of two officials, including a Beijing vice-mayor, who were targeted in fraud probes. Before that, the top executive at a Beijing steel plant was arrested. Now, Chinese sources say, at least 100 other city officials have been detained or arrested. "We are going to see more," says Huan Guocang, vice-president and senior economist at J.P. Morgan in Hong Kong. "It won't stop here."

Even while the 90-year-old Deng lingers on, the power struggle to succeed him is breaking out in earnest. Indeed, not since the student protests in 1989 has Chinese politics been racked by such tumult. Jiang, 68, hopes that cleaning out some corrupt officials will win support among ordinary citizens. Beijing locals are especially fed up with officials using their positions to enrich themselves and their families. Through these purges, Jiang is signaling opponents in the cities and provinces that none of them is safe. "Almost everyone has a skeleton," says one diplomat in Hong Kong.

It's a dangerous strategy. If Jiang pulls down many bigwigs, he could trigger a backlash among some powerful players. "If he pushes too hard, he'll make many enemies," says Tai Ming Cheung, a China analyst at Kim Eng Securities (Hong Kong) Ltd. Many Beijing leaders are also upset about Jiang's attempts to promote his "Shanghai clique" to positions of power within the capital. Jiang once served as Shanghai mayor and built a strong power base there. Moreover, the corruption issue cuts both ways. With so many government officials engaged in business activities, the trail could easily lead to embarrassing targets in Jiang's camp. "If you use corruption to get at people, it's a real can of worms," says a Western diplomat in Hong Kong.

As this power struggle consumes China's leaders, economic reforms are floundering. Jiang is more interested in maintaining social stability than forging ahead with bold initiatives. In recent weeks, he and his aides have sought to reassure the country's 140 million industrial workers that they will remain the "masters" of the nation. The emphasis now is more on protecting domestic industries than on attracting the massive foreign investment needed to modernize the country's infrastructure. Sorely needed reforms of the banking and state sector are stalled. "Dealing with things like inflation and state-owned enterprises isn't easy at the best of times, and this isn't the best of times," says a Beijing legal scholar. "We can expect economic reform to further slow."

LIGHTWEIGHT. It's not surprising that Jiang targeted Chen Xitong. Chen is an old political opponent of Jiang, long considered a lightweight with no future in the post-Deng era. As a result, Chen's officials often ignored central government directives, especially those regarding the booming real estate business. That's where Jiang stands to find the most ammunition. With scores of big projects under construction in Beijing, analysts expect local officials to stand accused of large-scale corruption. "Almost everyone is involved in bribery, and probably everyone is indictable," says a Beijing-based Western consultant in the construction industry.

The battle between the central government and city officials may help explain the travails last year of McDonald's Corp. The fast-food chain made headlines after city officials demanded it vacate its central Beijing site--for which McDonald's held a 20-year lease--to make room for a $1.2 billion commercial complex. But city authorities had signed off on the deal without getting approval from the central government. After the McDonald's case drew international condemnation, the central government intervened. Now, it is considering a new, scaled-down design. Meanwhile, McDonald's is still operating at the site.

In the months since the McDonald's case surfaced, the central government has stepped up its crackdown. In February, a top official from the Hong Kong subsidiary of Shougang, the capital's premier iron and steel company, was detained for alleged "economic crimes" but has yet to be formally charged. At the same time, city officials were interrogated about a Beijing-backed investment scheme that raised $350 million, apparently without central government approval. Many suspect that's why Beijing Vice-Mayor Wang Baosen shot himself on Apr. 4, making him the most senior communist official to commit suicide since the Cultural Revolution, which ended in 1976.

The pressure is mounting outside Beijing, too. Officials in the provinces are getting the message not to take on the central authorities. In April, a former top official from Guizhou Province killed himself, just months after his wife, once the head of the province's investment company, was executed for massive bribe-taking and fraud. Beijing denies the official committed suicide.

SINGLED OUT. The anticorruption campaign could spell trouble for some of China's "princelings," sons and daughters of high officials. Chen's son, Chen Xiaotong, is deputy general manager of Beijing's New Century Hotel. According to Hong Kong reports, he has been detained since last month, allegedly for economic crimes. The well-connected younger Chen is said to be involved in property deals in Beijing. Zhou Beifang, the detained Shougang official, is also a princeling.

The fact that Jiang singled out the elder Chen may go beyond political rivalry. Some believe the President will use Chen's arrest to reassess the Tiananmen Square massacre of June, 1989. Chen, a strong proponent of the crackdown, may take the rap for being the official who passed on inaccurate information about the demonstrations to the central leadership. By making Chen the scapegoat, Jiang could help distance himself from the incident--and gain popular support. That might isolate Premier Li Peng, a Chen ally even more closely associated with the 1989 crackdown.

It remains unclear whether Jiang has strong enough standing within the party to launch a purge aimed at weeding out high-level corruption--and his political foes. Jiang may be acting out of weakness, stirring up a maelstrom that he won't be able to control. Even so, many observers who had written off Jiang are impressed. "I think all of us naysayers who have been pooh-poohing Jiang Zemin as a kind of weak transitional figure may find reason to reassess," says a Western expert in Hong Kong. "He's making a calculated risk, betting that he has got the support to do it at this time."

Jiang's power play is heightening anxiety about China in the outside world. For instance, Southeast Asian nations are increasingly concerned about China's expansionist policies in the South China Sea. More unpredictable behavior is likely to continue. Despite China's impressive economic changes, "the political system is the same as it was 25 years ago," says Carl Goldstein, vice-president of Washington-based consultants International Strategic Advisors. That's why for now, all eyes are on Jiang Zemin and his anticorruption bandwagon.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE