Wednesday, February 27, 2008

Yao Gang, formerly of Guotai Jun'an, has been appointed vice chair of CSRC. Meanwhile, Zhu Congjiu, "with the permission of the Central Organization Department," was made assistant to the chair at the CSRC. Zhu of course was Liu Hongru's student at the PBOC grad school.

2008年02月27日 19:02 来源:中国新闻网 发表评论

  中新网2月27日电(记者 贾靖峰)中国证监会今天晚间宣布人事调整消息,国务院任命姚刚为中国证券监督管理委员会副主席、朱从玖为中国证券监督管理委员会主席助理。经中组部同意,朱从玖任中国证券监督管理委员会党委委员。




  姚刚同志1993年起任中国证券监督管理委员会期货监管部副主任、主任;1999年任国泰君安证券有限公司总经理、党委副书记、副董事长; 2002年任中国证券监督管理委员会发行监管部主任;2004年7月任中国证券监督管理委员会党委委员、主席助理兼发行监管部主任。(资料据中国证监会网站)

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Tuesday, February 26, 2008

New piece by my good friends Doug Fuller and Eric Thun. It is an interesting take...

A REVIEW Focus On Innovation: Can Asians Innovate? --- Engineers to Researchers
By Douglas Fuller and Eric Thun
2419 words
6 July 2007
Far Eastern Economic Review
(c) 2007 Dow Jones & Company, Inc.
Is China a paper tiger? A number of doomsayers have predicted that the end is near for China, with scenarios ranging from a simple halt in the country's rapid growth to a complete collapse of the Chinese state and economy. In many cases, the implicit points of reference for these doomsday predictions are China's neighbors. Whereas planners in Seoul, Tokyo and Taipei successfully built domestic firms to compete in international markets, the pessimists look at China's extensive reliance on foreign direct investment and see nothing but weakness.
The China boosters, on the other hand, look at the raw data of China's growth and conclude that China is on the fast track to becoming an economic superpower, with world class companies that combine cutting edge technology with low cost labor. These optimists look to Chinese companies, such as Lenovo and Shanghai Auto, and see the world's next Samsung and Toyota, but on an unparalleled scale -- Japan Inc. times ten. While there is certainly reason for optimism, this view fails to take into account the fundamental weaknesses of China's national champions. Simply put, many of these firms lack independent technological capabilities and destroy more value than they create.
The two viewpoints assume that successful developers will cultivate indigenous enterprises with independent technological capabilities like past Asian economic miracles. What the accounts overlook, however, is that the mechanics of the global economy have changed. Although FDI in itself is nothing new, what is new is the degree to which production chains have become globalized. China is rapidly developing in an era with new opportunities and constraints, and it should not be judged by the standards of the past.
Far from being a source of weakness, China's global linkages are driving the development of innovative capacities in China in three respects. First, the global network of ethnic Chinese engineers and technologists, commonly known as the bamboo network, is creating linkages to global technology centers and pools of highly skilled labor crucial to China's technical development. Second, multinationals are showing more willingness to locate research and design activities in China, and these investment projects become training centers for local engineers. Finally, these seeds of innovation planted by multinational investments spread to the broader economy, as Chinese engineers and technologists seek new opportunities in the rapidly growing sectors of the domestic economy.
Taiwanese and Chinese returnees from global centers of innovation, such as Silicon Valley, are at the forefront of China's technological development. These Chinese technologists are yet another manifestation of the ethnic Chinese business networks referred to as the bamboo networks.
In microelectronics, the number of chip designers in China quadrupled in five years to 7,000 in 2003 making China's design workforce almost as large as those in other chip design powerhouses, such as Taiwan and India. Returnees from Silicon Valley and Taiwanese firms have been the driving force behind this explosive growth. Two-thirds of the well-trained designers were working for firms run by Taiwanese or returnees from abroad. A critical mass of experienced returnees is now available, and this creates a snowball effect. These highly experienced returnees start their own China-based technology firms, train local engineers, and transplant the networking associations, such as the Chinese American Semiconductor Professionals Association, that were critical to Chinese entrepreneurship in Silicon Valley.
The same pattern can be found in microelectronics fabrication, an area of manufacturing that requires large numbers of skilled engineers. Semiconductor Manufacturing International Corporation (SMIC), a firm founded by the Taiwanese in 2000, has led China's rapid catch-up to near the technological frontier in process technology. SMIC now competes with Singapore's Chartered as the third largest pureplay foundry (firms which fabricate chips based on customers' designs). The key to SMIC's success is its engineering management team composed of Taiwanese and returnee engineers with decades of fabrication experience in Taiwan, Singapore and the U.S. These engineers in turn have trained hundreds of educated but inexperienced local engineers.
Ethnic Chinese networks are equally active in other areas of IT. Taiwanese firms have embraced a strategy of using mainland China in addition to Taiwan as the foundations of their core competencies, and they are consequently building up their R&D capabilities in China. Given the common cultural background, this movement of R&D facilities is a natural cross-border expansion for Taiwanese corporations. Some large technology firms, such as Hon Hai and Inventec, have even openly proclaimed their intention to become "Greater China" firms rather than simply Taiwanese firms. Inventec, a major producer of notebook computers, calls its Greater China strategy the "Twin Towers" strategy and has its entire software team of 3000 engineers in China.
U.S. utility patent data demonstrates the extent of bamboo network-driven innovation in China. Between 1997 and 2004, firms from the ethnic Chinese economies combined with those founded by returnees created 503 of China's 616 IT corporate U.S. utility patents. In contrast, the domestic firms including the major Chinese champions that get so much press in the West, such as Huawei and Lenovo, contributed only 11.
The impact of the bamboo network is not limited to the technology sectors. In the automotive sector, returnees from abroad are at the core of some of the fastest developing independent firms. Chery began producing cars in 1999 and only four years later had achieved annual sales of 80,000 vehicles. In March 2007, Chery was in the No. 2 sales position, behind Shanghai General Motors. The company epitomizes the broader trend of early success being leveraged into investment in research and design. These efforts revolve around returnees with extensive experience working in multinational auto firms, who were able to harness local talent and push the development process forward far more quickly than would otherwise be the case.
In the past, when advanced industrial countries were fraught with concern about the "hollowing-out" of their manufacturing bases, it was assumed that at least research and development would not be outsourced, as companies often preferred to keep core, value-added R&D activities at home. Nevertheless, the rising cost of R&D in advanced industrial countries, the growing availability of high quality R&D personnel in parts of the developing world and a newfound ability to harness information technology to divide up research and design activities -- what has been called the "death of distance" -- have all changed the calculations of multinational firms.
China is particularly well suited to take advantage of this trend towards the globalization of research and design. This is partly because in the 1990s the Chinese government used the lure of the domestic market to force multinationals to transfer technology and establish design centers there. This explanation however should not be overstated. Multinational firms are quite skilled at placating the Chinese governments with R&D centers that are little more than empty shells. What has proven to be more important are the internal incentives for MNCs to locate research and design activities in China.
Indeed, during the process of luring multinationals into China, firms began to realize how much China had to offer in terms of cheap, trainable science and engineering talent. The sheer numbers are impressive. In 2000, China had 220,000 engineers graduating from its universities. In comparison, the U.S. and the EU-15 together had less than 240,000 engineering university graduates (fewer than 60,000 from the U.S.). The price is also right. The salary of a Chinese electrical engineer is roughly one-tenth the salary of an American one. While it is true that many Chinese engineers are not experienced or efficient at the outset, the large majority of foreign firms can testify that these engineers, particularly the younger ones, are trainable. A large pool of trainable engineering graduates earning low salaries, combined with information technologies capable of linking foreign design centers with headquarters in a home country, make China a highly attractive location for research and design.
In short, multinational firms stumbled into something of a virtuous cycle in China: they came for the market, discovered good (if inexperienced) technologists and engineers at a very attractive price, and they began to utilize this new talent for increasingly sophisticated research and design work. The hope is that these new capabilities will increase both local and global competitiveness.
In the information technology sector, interviews with technologists in 33 foreign firms with R&D activities in China, including eight ethnically Chinese firms, revealed that these firms had trained over 20,000 Chinese engineers by 2004. This number far exceeded the 3,000 engineers doing actual R&D in domestic firms. Moreover, many of these R&D engineers moved from final design work (design for manufacturing) to more technologically sophisticated applied research and even basic fundamental research.
Similarly, in the automotive sector, it is increasingly common to find global firms exploiting design capabilities in China. In 2004, a total of 55 foreign-funded automotive technical centers operated in China. Visteon, Delphi and Bosch all have substantial design centers in Shanghai. PATAC, a JV between General Motors and the Shanghai Auto Industry Corporation, is the most advanced automotive design center in the country playing an increasingly important role in General Motor's success in China .
Although initial investments in auto sector design were made to support local customers, they have been integrated into global design networks. A recent GM SUV was jointly designed by engineers in Canada, the U.S., Japan, and China. Furthermore, the existing R&D centers are serving as a demonstration effect encouraging other MNCs to invest in R&D in China.
The multinational firms that invest in China not only create capabilities to support their own operations, they also create capabilities that can then be used by indigenous Chinese firms. The foreign-invested firms provide a training ground for local engineers and managers, and these skills spill over into the local economy as employees move on to join other firms or to start their own businesses.
The clearest manifestation of this trend is in flows of human capital. In the auto sector, for instance, relatively few domestic firms have the resources to lure talent from abroad, but all the major independent firms have the capability to lure personnel away from joint venture projects. Geely, one of the most successful private auto firms in China, is staffed at all levels with personnel from joint ventures. At the level of mid-level engineer, recent estimates show half of the 300 person design center with a joint venture background -- the next best thing to a returnee from abroad is a person with foreign experience in China.
A relatively recent phenomenon is the emergence of spin-off design firms. In the mobile phone industry, for example, dozens of firms founded by locals trained in MNCs have been created to design phones for the domestic market, including China's largest mobile design firm, Techfaith, founded by ex- Motorola engineers. In both Beijing and Shanghai, teams of engineers have left the JV design centers that they were trained in to create separate design houses catering to the independent Chinese auto firms that have little design capabilities of their own.
The presence of foreign-invested firms is also valuable because they provide immediate solutions as suppliers of key components. Rather than be forced to laboriously create capabilities across the board, these new indigenous firms can choose which capabilities they are going to focus on, and outsource the rest to foreign firms with strong technical capabilities. There is a danger of dependency in this strategy, but it does allow for much more rapid development than would otherwise be possible.
It is critical for companies and countries to understand the implications of China's new, global path to development. Domestic Chinese firms are not set to reorder industries in the manner of Japan's world-class firms in the 1970s and 80s. Rather than China's own companies, the operations of MNCs and smaller firms linked both to bamboo networks and China's foreign-invested sector represent China's competitive challenge to the world.
The global nature of China's technological development has several important implications. First, China's technonationalist goals, most recently highlighted by government calls for indigenous innovation, will be frustrated by China's techno-globalist success. Chinese nationalists should stop wasting public monies on these fruitless efforts and instead embrace the global links that are driving China's technological development. While respecting China's growing capabilities and insisting that it lives up to its WTO obligations, when technonationalist planners in Beijing try to circumvent them, foreign governments (the Pentagon in particular) and companies alike should not mistake China's technonationalist ambitions for its readily realizable goals.
Second, the ties binding China to the global economy are likely to create a different set of political tensions than the rise of Japan did. Domestic fights over trade with Japan tended to be intra-sectoral. With China, the economic "threat" is our own companies exporting from or offshoring progressively high skilled activities to China. In this case, the domestic political fight is closer to a traditional clash between labor and capital.
Third, new trade tensions will require new political solutions. Rather than shifting resources and employment to more competitive sectors -- the American answer to the Japanese challenge -- the new political solution to preserve trade will have to address the concerns of the progressively larger sections of the population affected by economic engagements with China. Part of such a solution should consider taking China's challenge seriously and to increase investment in innovative capacities at home in order to guarantee a prosperous future for the home society. Just as China is increasing its investment in R&D and education of its people, advanced economies need to increase domestic investments in education and R&D to meet the unique challenges of China's rise.
Mr. Fuller is an assistant professor at the Chinese University of Hong Kong. Mr. Thun is the Peter Moores university lecturer in Chinese Business Studies at Oxford's Saïd Business School.

I can't agree more with authors' judgments on Chinese facts. But, I don't know why US should increase the domestic investments in education and R&D to meet Chinese challenges. Parallel the topic from R&D to simple laboring sectors and from US-China to China-Vietnam. Should China save more university funds for technical high schools to meet Vietnamese challenges of labor prices?

I think US will be allured to turn right or conservative to protect her people who just sell their labors at high prices. While, educating and training sectors of US are facing huge chances to export their services into China. Even if Chinese gov does not open the local diploma market, the local certification (like CFA) programs can always thrive.
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Friday, February 22, 2008

So, the rumors of the government being downsized in Beijing are true! The Politburo just passed a "proposal" (ie decree) saying so. The word is that Ministry of Transport will be merged with the Ministry of Rail and the Civil Aviation Admin, which makes sense. More contentious may be the merger of Ministry of Agriculture with the Ministry of Forestry and Ministry of Water Works. We'll see how it all plays out.


2008年02月23日03:53 来源:人民网-《人民日报》
【字号 大 中 小】 打印 留言 论坛 网摘 手机点评 纠错
  新华社北京2月22日电 中共中央政治局今天召开会议,决定2月25日至27日在北京召开中国共产党第十七届中央委员会第二次全体会议。中共中央总书记胡锦涛主持会议。






  《人民日报》 ( 2008-02-23 第01版 )

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Tuesday, February 19, 2008

Wow, the State Council list is out. It seems international confidence is playing an important role in determining appointments in the financial bureaucracy. Wang Qishan, widely respected abroad as a capable financial administrator, will take over as the Vice Premier in charge of finance and trade, while Zhou Xiaochuan, another widely recognized figure abroad, will stay put as the head of the PBOC (Sorry, Shang Fulin).

In the end, Kim Il-sung University graduate Zhang Dejiang was not put in charge of all the banks in China. Ready, 1-2-3, deep heave--sigh........(of relief). Instead, he will be in charge of transport. This arrangement puts executive vice premier Li Keqiang, who is slated to be Wen's successor, in charge of unflashy portfolios of balancing the budget and controlling prices (planning), but these are portfolios that can earn him a lot of political capital through distributing money to domestic interests.

Oh, I have a question. What is Wen in charge of now?

Leaders settle on top roles in State Council
Wang Xiangwei in Beijing
417 words
4 February 2008
South China Morning Post
(c) 2008 South China Morning Post Publishers Limited, Hong Kong. All rights reserved.

The mainland leadership has reached broad consensus over the leading positions in Premier Wen Jiabao's State Council for his second five-year term, with Wang Qishan taking over the expanded portfolios of financial affairs, foreign trade and investment.

The new State Council will be sworn in immediately after the National People's Congress rubber-stamps the personnel changes at its annual plenary session, which starts on March 5.

Except for Premier Wen and Vice-Premier Hui Liangyu , who will continue to oversee agriculture, all the leading officials, including vice-premiers, will be new faces.

The responsibilities and portfolios of officials are also expected to be redistributed and redeployed.

Sources said Li Keqiang , a protégé of President Hu Jintao and tipped to become the next premier in 2013, would become executive vice-premier. He will focus on macroeconomic issues by overseeing the Ministry of Finance and the National Development and Reform Commission.

Mr Wang, who is known as a trouble shooter for his leadership skills and experience in the banking sector, will assume responsibility for financial affairs as well as foreign trade and investment, which are currently managed by Wu Yi , who will retire next month.

This will make Mr Wang the principal official in dealings with Washington over thorny trade and currency issues in the next five years.

Mr Wang will also be the key person the Hong Kong government should focus on when lobbying for closer integration with the mainland economy.

To ensure financial stability, the top leaders have decided not to reshuffle the leadership at the People's Bank of China or the regulators of the securities, banking and insurance sectors. There had been intense speculation that central banker Zhou Xiaochuan would be transferred to become party secretary of the China Academy of Social Sciences, a leading government think-tank. His transfer would have almost certainly triggered a reshuffle of the leadership at the three regulators.

Sources said Zhang Dejiang , who was previously rumoured to be taking over Ms Wu's portfolio of trade and investment, would in fact be responsible for industries and transport.

The central government is considering enhancing its regulation of industrial development by creating a Ministry of Industries and Energy and merging the ministries of aviation, railways, and communications into a super transport ministry.

Liu Yandong , a Hu ally, is expected to fill the newly created role of fifth vice-premier, covering education and sports.

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Friday, February 15, 2008

Well, Ming Pao came out with a story (analyzed below by Hsiao writing for China Brief) stating that Xi Jinping will take over as the vice chairman of the Central Military Commission as early as the 2nd plenum. If true--and I think there is a definite probability of that--, Li Keqiang would be more or less out of the running to become successor to Hu. Is Hu this determined to retire in an orderly manner? They all say they would retire gracefully, even Mao did!

China Brief
Volume 8, Issue 4 (February 14, 2008) | Download PDF Version

Who's Hu's Successor?

By Russell Hsiao
The Hong Kong based newspaper Ming Pao learned from sources in Beijing that Xi Jinping—who was only recently elevated by President Hu Jintao to become a member of the Standing Committee of the Political Bureau of the Communist Party of China (CPC) Central Committee—may be slated to replace Defense Minister Cao Gangchuan in the position of vice chairman of the Central Military Commission (CMC) (Ming Pao, February 11). Chinese news sources speculate that the announcement will be made at the Second 17th National Congress, which will be held in the latter half of this month, whereby the congress will deliberate on the selection of nominees for leadership positions in state organs. Speculation is rising that Xi may be nominated to replace Vice President Zeng Qinghong, who is set to leave his post at the 11th National People's Congress (NPC), which follows the first session of the 11th Chinese People's Political Consultative Conference (CPPCC), opening on March 5 and March 3, respectively (Ming Pao, February 11).

The decision for Xi—a member of the so-called group of "PLA Princes"—to take over the position of vice chairman of the Central Military Commission is believed to have been arranged at the First 17th National Congress in October 2007 (Ming Pao, February 11). As Jamestown Senior Fellow Willy Lam noted in a recent issue of China Brief, Xi is a relatively neutral figure within Chinese power bloc politics, and accepted by most factions in the CPC polity (China Brief, April 18, 2007).

If the reports about Xi's prospective appointment as vice chairman of the CMC are accurate, it will solidify Xi's position at the helm of the so-called "fifth generation" of CPC leaders and place him on the fast track of becoming President Hu Jintao's most likely successor in 2012. His appointment, if approved, will initiate the transitory phase of "replacing the old with the new" (xinlao jiaoti) in CPC generational politics, which will groom the eventual successors of the 18th National Congress in 2012.

Citing an expert familiar with Chinese leadership transition, Ming Pao noted that two noticeable differences will affect the leadership transition process this time around. Firstly, it is not likely that Hu will want to wait until 2012 before handing full authority to Xi, since seven years is not enough time to groom a leader to take over the helm of the CPC. Secondly, the way that Hu handles state affairs is different from his immediate predecessor Jiang Zemin. The aforementioned expert believed that Hu intends to hand power over completely in one transition at the 18th National Congress, and in particular, Hu will not want to stay for an extra two years as chairman of the CMC. Therefore, the expert said that there is even a possibility that Xi Jinping will "reach the position in one step" (yibu daowei) to become the first vice chairman of the CMC at the Second 17th National Congress (Ming Pao, February 11).

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Reader dylan left the following article as a comment, but I thought its importance merit its posting. When I saw this a few days ago, my reaction was "ah, here we go again." According to people involved in the distressed asset business, much more is to come. Remember, the Ernst & Young report from a year and half ago, which was retracted after heavy government pressure, stated that much of the special mention loans in China are in fact NPLs. If even half of that is true, there is a large pool of NPLs sitting out there. Last year, things kept humming along because banks could provide new loans when old loans came due, thus avoiding NPL designations. However, with macro-economic retrenchment and loan ceilings, there is much less room to do so this year. Worst case: this could create a spiral where old NPLs come to light at the same time that new NPLs are created by falling real estate and stock prices....

Again, thank you dylan for pointing out this important trend.

BEIJING, Feb. 15 (Xinhua) -- Non-performing loans (NPL) among the five major Chinese state-owned banks hit 1.11 trillion yuan (about 155.3 billion U.S. dollars) in 2007, up 35.13 billion yuan from the third quarter.

For the five banks, the NPL ratio hit 8.05 percent, 0.22 percentage points higher than the third quarter, the China Banking Regulatory Commission (CBRC) said here on Friday.

The five lenders refer to the Bank of China, China Construction Bank, the Industrial and Commercial Bank of China, the Agricultural Bank of China and the Bank of Communications.

Analysts explained the NPL rebound in the five banks might result from the sub-prime loan crisis in the United States, especially for the Bank of China and the Industrial and Commercial Bank of China.

The crisis has had little effect on other Chinese banks who have little overseas business.

With outstanding NPL standing at 86.04 billion yuan, 12 Chinese joint-stock commercial banks reported a 2.15 percent ratio of NPL last year, a drop of 0.26 percentage points from the third quarter, the CBRC said.

The NPL ratio of city commercial banks declined to 3.04 percent in 2007 from 3.67 percent in the third quarter.

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Tuesday, February 05, 2008

Yet another excellent piece by Willey Lam on Shanghai

Hu tightens grip over Shanghai faction
By Willy Lam

Since dumping former Shanghai party secretary Chen Liangyu in late 2006, President Hu Jintao has tightened his control over the east China metropolis - as well as the so-called Shanghai faction in the tangled politics within the Chinese Communist Party (CCP).
At stake is more than the resolution of the longstanding slugfest between the two major CCP cliques - the Shanghai boys under ex-president Jiang Zemin versus the Communist Youth League (CYL) faction under Hu. In Hu's calculus, reining in Shanghai's notorious centrifugalism will go a long way toward establishing the party-and-state headquarters' authority over the nation's "warlords", a reference to recalcitrant regional cadres who refuse to heed Beijing's edicts.

This is despite that many outside the CYL cabal are disturbed by the fact that Hu has planted his underlings in more than half of China's 31 provinces and directly administered cities. Hu, also CCP general secretary and chairman of its Central Military Commission (CMC), has entrusted the job of taming Shanghai to Politburo member Yu Zhengsheng, who took over from "Fifth-Generation" rising star Xi Jinping as party boss of the super-rich city three months ago.

Hu and Yu are political allies despite that the latter never served in the CYL. Like Hu, the 62-year-old Yu was a protege of late patriarch Deng Xiaoping. Yu once worked for Kanghua Corporation, one of China's first "Western-style enterprises" that was set up by Deng's son, Deng Pufeng, in the early 1980s.

Political sources close to the Hu faction note that one of Yu's key missions is to dismantle Shanghai's "city-state within a state" status, which the mega city achieved with the blessing of Jiang, a former Shanghai party chief. Firstly, Yu must ensure that Shanghai will not contravene or water down Beijing's directives. Perhaps more significantly, Yu is gradually ending the age-old practice of "Shanghai people running Shanghai", which meant that top slots in the Shanghai party and government apparatus will be reserved for "native sons".

It is indeed a time-honored tradition for Beijing to install "carpetbaggers" to run a particular province, autonomous region, or major city. In 1998, then-president Jiang Zemin named a northerner, Li Changchun, party secretary of the southern province of Guangdong in 1998 with the explicit purpose of ending the tradition of "Guangdong people running Guangdong" (yuerenzhiyue). This special arrangement for Guangdong was granted by late patriarch Deng in return for the contributions made by Marshal Ye Jianying to ending the Gang of Four's reign of terror.

Shortly after taking office, Yu pronounced his now-famous "Ten Commandments", or what local officials must do to avoid running afoul of the law and morality - and the instructions from the Zhongnanhai party-and-state headquarters. Speaking at a meeting called by the Shanghai Municipal Commission on Disciplinary Inspection, Yu said officials must pledge "not to go against political discipline, to stop 'doing things as one likes', and to remain at a high level of unity with central authorities". On another occasion, Yu vowed that the metropolis would be "at the service of the entire nation". Pointing to how Shanghai's dramatic growth the past decade was predicated on support from all parts of China, the party boss said, "Shanghai has the responsibility to serve the entire nation, and to make the requisite contributions to the economic and social developments of the entire nation."

At the same time, Yu has imposed tighter disciplinary regulations on local officials. For example, mid- to high-level officials have to declare their assets. While these policies may not be popular among Shanghai officials, they have acquiesced in Yu's leadership partly due to the well-known fact that the new Shanghai leader has the full backing of the Hu-Wen team.

Disgraced Shanghai party boss Chen had alienated the leadership under Hu and Premier Wen Jiabao by repeatedly failing to toe the central line. In early 2004, Wen unveiled with great fanfare a series of "macro-level control and adjustment" policies aimed at cooling down overproduction and overheating, especially in sectors such as properties, steel and raw materials. Shanghai, however, refused to go along.

Even worse, many of the glamorous real-estate and infrastructure projects in the metropolis were anchored on corrupt and "insider" deals between municipal officials and their business cronies. Both before and after Chen's arrest in September 2006, two dozen-odd of Shanghai officials and businessmen have been investigated - and in some cases detained - for illegally using the municipality's pension and social-welfare funds to bankroll property acquisition and other ventures.

Equally importantly, Yu, together with the CCP Organization Department - which is headed by long-time Hu protege Li Yuanchao - has begun to chip away at the tradition of "Shanghai people running Shanghai" (wurenzhiwu) by installing more Beijing "carpetbaggers" to senior municipal positions.

One of Deng's most memorable dictums is that leaderships at both the central and regional levels must come from "the five lakes and the four seas" (wuhusihai), meaning they had to come from different factional and geographical backgrounds. Last month, Tu Guangshao and Ai Baojun, two Sixth-Generation cadres - those born in the 1960s - who hail from Hubei and Liaoning provinces respectively, were named vice mayors. Tu, 48, a former vice chairman of the Beijing-based State Securities Regulatory Commission, is a fast-rising technocrat who is expected to shepherd Shanghai toward its goal of becoming a major financial center of the Asia-Pacific Region.

Ai, 47, is a specialist in the steel industry with experience in Shanghai's giant Baogang Steel Mill. The US-trained Ai is expected to be in charge of industry and infrastructure in the mega city. Political circles in Shanghai are also rife with speculation that Mayor Han Zheng would soon be posted elsewhere after Yu had acquired a better handle on municipal affairs. This is in spite of the fact that on assuming office late last year, Yu had tried to boost morale among Shanghai officials by saying that Han, who had spent his entire career in the metropolis, would stay on to help him run the city.

Since the CCP swept to power in 1949, Shanghai has been administered mostly by politicians who were either born in the metropolis and neighboring cities - or who have spent a good chunk of their career there. The Shanghai-based Gang of Four, led by Mao's wife Jiang Qing, managed to not only dominate local politics but also install Shanghai cadres in senior posts in Beijing. The Shanghai faction had their heyday from 1990 to 2002, when former Shanghai party secretary Jiang Zemin was CCP general secretary and president. Jiang was even able to pack the Politburo Standing Committee with Shanghai faction affiliates such as Wu Bangguo, Zeng Qinghong, and Huang Ju - all former party secretaries - on his retirement from the top party post in 2002.

Since Jiang's retirement from the CMC chairmanship in September 2004, however, most Shanghai faction heavyweights have either retired or crossed over to the Hu-Wen camp. It is a mark of Hu's "magnanimity", as well as his cautious observation of the CPP tradition of "not beating up a dog which is already down in the water", that most of the tainted Shanghai faction affiliates - as well as their kinsfolk - will likely escape punishment. It is perhaps due to such Byzantine considerations that Chen's case has still not been heard in a court of law.

Similarly, the large number of Shanghai officials who had profited from their association with former Shanghai real-estate billionaire Zhou Zhengyi - who was in late December sentenced to a 16-year jail term for market manipulation and corruption-related practices - will not be penalized.

Zhou was allegedly a business partner of the sons of two Shanghai faction stalwarts; while the latter have never been charged, they have dropped out of the media limelight since Zhou's shenanigans were first exposed in 2003. It is understood that in return for Hu not going after the cronies and relatives of selected Shanghai faction heavyweights, the latter have agreed to unreservedly profess their loyalty to his new reign.

Some observers believe that Hu does not want to alienate the Shanghai faction too much because he seems to be following in the empire-building footsteps of ex-president Jiang by vastly expanding the clout of the CYL faction. In the run-up to and after the 17th CCP Congress last October, Hu and the CCP Organization Department had appointed Hu's allies to senior slots in cities and provinces including Beijing, Shanghai, Guangdong, Sichuan, Guizhou, Shaanxi and Shanxi.

Moreover, several of the new leaders of strategic regions, such as the party secretaries of Guangdong and Sichuan - Wang Yang and Liu Qibao, respectively - had barely served in their former posts for two years or so. This has given the impression to observers that Hu has put the aggrandizement of his own clique above the efficient deployment of talent.

At a time when central initiatives are sourly needed to cope with urgent problems such as runaway inflation, many in China are perhaps willing to back the Hu-Wen team's emphasis on the fail-safe implementation of Beijing's edicts. On the inauguration of his second cabinet in March, Wen is expected to call on localities to sacrifice parochial interests to guarantee the attainment of national goals to bring about a soft landing in the economy and to restore the country's badly damaged ecological system.

Recentralization of powers is a major reason behind the imminent formation of a number of "super-ministries" in fields including energy, finance, agriculture, transportation and the environment. In the absence of genuine political reform, however, the party-and-state apparatus lacks institutional means to ensure an equitable balance of power between the center and the localities.

After all, the Hu-Wen team has to use the "anti-corruption card" to get rid of unwieldy warlords such as Shanghai's Chen. Moreover, Hu might even lose his moral high ground if the large number of CYL faction members he has installed in regional administrations were unable to pass muster in being both "red and expert" (youhongyouzhuan); that is, loyal to Beijing in addition to doing their jobs well in the eyes of the paramount leader.

Willy Wo-Lap Lam is a senior fellow at The Jamestown Foundation. He has worked in senior editorial positions in international media including Asiaweek newsmagazine, South China Morning Post and the Asia-Pacific Headquarters of CNN. He is the author of five books on China, including the recently published Chinese Politics in the Hu Jintao Era: New Leaders, New Challenges.

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