Shanghai’s fortunes sliding away

Graft probe in Shanghai raises questions about the boomtown’s future.

HONG KONG: Since the mid-1990s, Shanghai has been a city where skyscrapers would come up in the blink of an eye. 

That fast-track progress was made possible, in part, because China’s central leaders, principally (former) President Jiang Zemin, who served as Shanghai Mayor before being hand-picked by Deng Xiaoping in Beijing, ushered in preferential policies in order to attract investments. Shanghai dreams of becoming an international financial centre — in the same way that Mumbai dreams of becoming a Shanghai — and it appeared that China’s leaders would make Shanghai’s dream come true with the sheer force of their political will. 

But that dream run may be about to end following the dismissal on Monday of Shanghai’s Communist Party secretary Chen Liangyu for his alleged involvement in the misappropriation of social security funds. The dismissal is widely perceived as a signal of the waning influence of the ‘Shanghai Gang’ (as the power elite that owes allegiance to the retired Jiang are known), and of current President Hu Jintao’s boldest political move to stamp his authority on the Party. 

Shanghai’s breathtaking rise was in some ways underwritten by the frenetic growth of the property market. In recent years, property prices have shot up dramatically and made housing increasingly unaffordable for middle and low-income households. At a time when the central government was trying to cool down the economy from overheating, the social exclusion of large sections of the people because of rising land prices was causing an acute sense of embarrassment to central leaders who have sworn to build “a harmonious society”.

That slogan — “building a harmonious society” — is itself an acknowledgement that by focussing largely on the big cities on the eastern coast, economic development had given rise to glaring social inequities. And President Hu and Premier Wen Jiabao, who project a staid image of themselves — unlike the flamboyant Jiang — have repeatedly proclaimed their intention to address these social problems. 

The scandal that unseated Chen revolved around the illegal diversion of social security funds into the real estate market. Hence, market players sensed an immediate downturn in the prospects for the property market. Stock prices of property companies fell sharply with Chen’s dismissal.

Signs that Shanghai’s fortunes may already be sliding were manifest earlier this month when Beijing went public with a plan for a trial liberalisation of the foreign exchange trading system in the Tianjin Binhai New Area, near Beijing. Shanghai’s position as China’s financial capital could well be in jeapordy down the line if it continues to lose out to other centres in such ‘laboratory’ trials of financial innovations. 

Also, the latest corruption case starkly shows up the underbelly of the financial system in Shanghai, and the absence of adequate checks in the system. Given their political entrenchments, local leaders effectively stonewalled efforts by the central government to clean up the system. Now that a leadership change has been effected, in quite dramatic circumstances, Shanghai’s financial system could well be in for an overhaul.