VZCZCXRO4848
RR RUEHCN RUEHVC
DE RUEHGH #7129/01 3480935
ZNY CCCCC ZZH
R 140935Z DEC 06
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 5364
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 5693

C O N F I D E N T I A L SECTION 01 OF 04 SHANGHAI 007129 
 
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 ITA/MAC - A/DAS MELCHER, MCQUEEN 
NSC FOR WILDER AND TONG 
 
E.O. 12958: DECL:  12/14/2031 
TAGS: PGOV PINR EINV ECON KPAO CH
SUBJECT: SHANGHAI LEADERSHIP UPDATE 
 
REF: A) SHANGHAI 6957; B) SHANGHAI 7121; C) BEIJING 30588 (97); D) SHANGHAI 7112 
 
SHANGHAI 00007129  001.2 OF 004 
 
 
CLASSIFIED BY: Kenneth Jarrett, Consul General, U.S. Consulate, 
Shanghai, Department of State. 
REASON: 1.4 (b), (d) 
 
 
 
¶1.  (C) Summary.  In the continuing fallout of the pension 
scandal that led to the ouster of former Party Secretary Chen 
Liangyu (Ref A), four Shanghai contacts viewed acting Party 
Secretary Han Zheng as a transitional figure likely to be 
 
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replaced at, or before, the 17th Party Congress.  The South 
Korean CG told us that President Hu Jintao had already made his 
decision on who would fill the slot, noting that it would be 
someone from outside Shanghai.  United Front Work Department 
Head Liu Yandong was very interested in the position, but 
President Hu Jintao remained tight-lipped over who he was trying 
to promote.  Both Han Zheng and Vice President Zeng Qinghong had 
been instrumental in Chen's ouster.  The children of several top 
leaders were also involved in the scandal but it appeared that 
all but Chen's son--who apparently fled the country--would 
likely not face prosecution in order to maintain party unity. 
Hu had been increasing his authority since the scandal, 
including replacing the head of the Shanghai Discipline 
Inspection Commission (DIC) with an outsider, answerable only to 
Beijing.  Meanwhile, a second wave of Central DIC inspectors 
have moved into Shanghai, suggesting that the pension scandal 
was entering a new phase.  Huang Ju remained seriously ill and 
returned to Shanghai for treatment.  End summary. 
 
------------------------------------ 
Who Will Take the Reins in Shanghai? 
------------------------------------ 
 
¶2.  (C) During a December 6 meeting, Shanghai Municipal People's 
Congress Researcher Zhou Meiyan said the current thinking in 
Shanghai was still that acting Shanghai Party Secretary Han 
Zheng would likely be replaced as Party Secretary by the 2007 
Party Congress.  During a November 27 discussion, Jiaotong 
University Dean of the School of Public Affairs and 
International Relations Hu Wei said he believed Han would be 
replaced prior to the Congress.  He added that it was abnormal 
in a province to have both the top party and government slots 
occupied by persons who had risen through the local ranks. 
Shanghai had been the exception for many years and Professor Hu 
believed that President Hu Jintao planned to rectify this 
situation.  The South Korean CG recently told us that, according 
to a district level official, Hu Jintao has already identified a 
new Party Secretary for Shanghai.  The South Korean CG did not 
know the name but was told the person was not from Shanghai. 
Moreover, the South Korean CG understood that Han Zheng would 
remain in place as Mayor. 
 
¶3.  (C) During a November 30 dinner, Yang Yuanxing (Ref B), 
husband of United Front Work Department Head Liu Yandong, said 
that Liu, often named as potential candidate for the job, was 
very interested in the position.  Liu spent her early childhood 
in Shanghai and spoke the local dialect.  However, when asked if 
he was considering her for the spot, President Hu reportedly 
said he had not considered the matter and would have to research 
it.  During a follow-up meeting on December 4, Yang said that Hu 
claimed not to know who would take over the job from Han. 
 
----------------------------------------- 
Sacking of Chen Liangyu Served Many Goals 
----------------------------------------- 
 
¶4.  (C) During a December 12 conversation, University of Hong 
Kong School of Economics and Finance Associate Professor Xiao 
Geng said that Beijing had used Chen's sacking, in part, to cool 
down Shanghai's economy and other fast growing parts of China. 
Xiao explained after Chen's arrest, there was an immediate drop 
in fixed asset investment, imports, and bank lending.  He added 
that this highlighted Beijing's lack of effective macroeconomic 
controls. 
 
¶5.  (C) During the same meeting, Huang Jing, the Brookings 
Institute's Thornton China Center Senior Fellow, said that 
President Hu Jintao had sacked Chen to send a message that 
Beijing would no longer tolerate provincial backtalk on its 
policy goals.  Chen was the most vocal proponent of the 
"Shanghai model" of economic development that many coastal and 
some inland cities had adopted.  According to Huang, Chen had 
known for some time that his days were numbered and that he had 
 
SHANGHAI 00007129  002.2 OF 004 
 
 
a choice: he could promote Hu's wealth redistribution policy and 
still get sacked, or stick to his ideas and go down fighting. 
Chen, Huang said, had chosen the latter tack. 
 
¶6.  (C) Huang also noted that Mayor Han Zheng had played a large 
role in Chen's ouster.  Huang said that Han had been passing 
information on Chen's misdeeds to Beijing.  Han's promotion to 
acting Party Secretary was his payoff for his cooperation. 
Huang said he expected Han to complete his term as Mayor since 
he had proven his loyalty to Hu Jintao.  Huang did not say if it 
Han volunteered the information or had been asked to help. 
Huang said that compared to other officials at his level, Chen 
had actually not been very corrupt.  Huang also stressed the 
instrumental role that Zeng Qinghong had played in the 
investigation that led to Chen's downfall.  According to Huang, 
Jiang Zemin said that Chen got what he deserved ("huogai"). 
 
------------------- 
Return to Your Cage 
------------------- 
 
¶7.  (C) Huang said that the Shanghai crackdown illustrated Hu's 
efforts to carry out reforms within "the cage" but noted that in 
practice this would be impossible.  What China's economy needed 
was decentralization and greater rule of law.  Hu, however, was 
falling back on recentralization and focusing on party 
discipline, the only tried and true tools of Communist rule. 
Xiao agreed with Huang's assessment and argued that there was no 
way that central policy could be appropriate for all localities. 
 He added that there were a number of interest groups with 
vested interests in the Shanghai model that stood to lose out 
significantly if Hu were successful in adopting the Harmonious 
Society model.  (Comment: The "cage" reference dates back to the 
early period of the reform movement when conservative party 
elder Chen Yun compared China's centrally planned economy to a 
bird in a cage, with the plan being the cage and the bird the 
economy.  Chen argued for expanding the cage, or the boundaries 
in which the economy could operate, but stressed that central 
control of the cage was necessary to avoid chaos.  End comment.) 
 
 
--------------------------------------------- ----- 
Princeling Connection to Pension Scandal Runs Deep 
--------------------------------------------- ----- 
 
¶8.  (C) Professor Hu said that the families of several top 
leaders were involved in the pension scandal that toppled former 
Shanghai Party Secretary Chen Liangyu.  He referred to Jiang 
Zemin's elder son, Jiang Mianheng as a "stake holder" in the 
real estate transactions associated with the scandal.  He also 
noted that Vice Premier Huang Ju's daughter, Huang Fan, was 
involved and that Huang Ju and Chen had enjoyed a very close 
relationship.  Zhou added that Jiang's younger son, Jiang 
Miankang, had been involved in the scandal through Chen 
Liangyu's son, Chen Weili. 
 
¶9.  (C) Professor Hu explained that President Hu would not go 
after Jiang's children through this scandal, since it would 
threaten the party's legitimacy to go after the family members 
of "respectable" leaders (i.e., Politburo members or retirees 
who had not lost their party membership or been prosecuted.). 
He noted, however, that if top leaders fell from power, their 
families were no longer off limits.  Zhou said that Chen Weili 
was wanted by law enforcement officials but had managed to slip 
through their fingers and had probably fled the country.  She 
said that it was a common practice for the family members of top 
leaders to have multiple passports to smaller countries, such as 
Iceland, allowing them to escape relatively undetected when 
things went badly for their families.  (Note:  The last time in 
recent memory that a Politburo member fell--Beijing Party 
Secretary Chen Xitong in 1996--his son, Chen Xiaotong, was 
 
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arrested and sentenced to 12 years in prison (Ref C).  End note.) 
 
¶10.  (C) Zhou said that travel had become more difficult for 
senior Shanghai leaders at the department level and above. 
Department directors and above needed to turn their personal 
passports in to their work units for "safekeeping" and all 
leaders at the bureau level and above needed approval from the 
Shanghai Organization Department for personal overseas travel. 
Although these restrictions had been in place well before the 
Shanghai pension scandal broke, enforcement had been stepped up 
since Chen's arrest.  Zhou denied rumors that Han Zheng was 
personally chopping off on officials applying for overseas 
travel. 
 
SHANGHAI 00007129  003.2 OF 004 
 
 
 
--------------------------------------------- --------- 
Naming of New DIC Head in Shanghai Reflects Hu's Power 
--------------------------------------------- --------- 
 
¶11.  (C) Zhou noted that Beijing recently appointed Shen Deyong 
as the new head of Shanghai's Discipline Inspection Commission 
(DIC).  While past heads of the DIC had risen through the 
Shanghai ranks, Shen was most recently a vice president of the 
Supreme People's Court.  Zhou said that President Hu's authority 
had increased dramatically since the removal of Chen Liangyu. 
The replacement of the head of the Shanghai DIC was meant to 
send a message to other provincial leaders that Beijing was in 
control and would not tolerate deviation from Hu's line.  By 
having the local party watchdog answerable to Beijing instead of 
local party bosses, Hu was giving the DIC teeth to collect 
information on local officials which would be passed directly to 
Beijing without the provincial filter.  (Note: Since September, 
the heads of 12 provincial DICs had been replaced, nine with 
outsiders.  This represented a real change from the past 
practice of DIC heads being promoted from the provincial ranks. 
End note.)  During a December 5 meeting, Weyerhaeuser China 
General Manager Zhang Renren compared the outsiders taking up 
these posts to the imperial inspectors of the Qing Dynasty. 
These inspectors carried with them a three-sided sword that both 
represented their authority to act in the name of the emperor 
and could be used to lop off the heads of local officials found 
to be out of harmony with Beijing's directives. 
 
¶12.  (C) Professor Hu separately added that the current 
anti-corruption campaign was not a real crackdown but a 
"political game" Hu was using to consolidate his power.  He 
noted that if Chen had not been removed, his youth and position 
on the Politburo would likely have made him a candidate for the 
next General Party Secretary.  Hu did not like Chen and saw Chen 
as a threat to his own power.  Hu needed to remove Chen before 
the 17th Party Congress to prevent Chen from consolidating 
support for his promotion bid.  Professor Hu said that Mayor Han 
Zheng was also involved in the pension scandal, as was Huang Ju. 
 However, bolstering the idea that this was a political game and 
not a rethinking of the system of governance, neither man had 
been removed because of their involvement.  In Han's case, 
President Hu assessed that removing him would have been too much 
of a shock to the Chinese political system.  (Comment:  To 
remove, at the same time, both the top government and party 
leaders of a provincial level entity would have presumably had 
an impact far beyond Shanghai, which would also have been 
destabilized.  End comment.)  In the case of Huang Ju, President 
Hu did not see the political benefit to be derived from making 
Huang's connection to the case public since Huang was already 
dying. 
 
----------------------------------------- 
Investigation May be Entering a New Phase 
----------------------------------------- 
 
¶13.  (C) Zhang Renren said that his contacts had informed him 
that a new group of inspectors from the Central Discipline 
Inspection Commission had recently moved into the Eastlake Hotel 
(Donghu Binguan) near the Consulate on Huaihai Road.  He said 
this probably indicated that the first round of the 
investigation was complete--those investigators had stayed at 
the Moller Villa--and Shanghai was gearing up for round two. 
Indeed, when Poloff called the hotel to inquire about rooms the 
hotel said that one of its two buildings had been completely 
rented out. 
 
-------------------------------- 
Huang Ju: Dying to Leave Beijing 
-------------------------------- 
 
¶14.  (C) During a December 1 meeting, Citibank China CEO Richard 
Stanley said that in his discussions in Beijing, he had heard 
that Huang Ju was still sick with cancer and resided in Shanghai 
(Ref D).  Huang was "technically retired" and would probably be 
officially retired in March 2007.  Zhou confirmed that Huang 
was, indeed, in Shanghai.  Her contacts in the Shanghai 
government said that Huang had refused treatment from Beijing 
doctors, insisting on medical staff being flown in from 
Shanghai.  Eventually, he insisted on being transferred to 
Shanghai.  Huang did not trust the doctors in Beijing and was 
scared that Hu Jintao would order them to provide sub-standard 
care, hastening his death.  Yang confirmed that Huang was 
gravely ill and denied reports that he had simply had a 
 
SHANGHAI 00007129  004.2 OF 004 
 
 
pancreatic infection. (Note: Huang Ju's last public appearance 
was November 21 when he met in Shanghai with the head of the New 
Zealand Banking Group.  A photo of Huang at the event can be 
found at 
http://sh.news.163.com/06/11/22/09/30H8AE4S00 370087.html.  End 
note.) 
JARRETT