Power play
By Almerindo Portfolio September 28th, 2006The Shanghai pension scandal just gets hotter and hotter. First Shanghai’s top Party chief, Chen Liangyu, was sacked for gross ethics violations, and now the imminent IPO of Shui On could be endangered by the company’s possible entanglement with the scandal. And investigators have said that there may be more purges to follow.
Most of the commentary on the subject portrays it as a consolidation of power on the part of Hu Jintao. With the party congress coming up next year, many positions of power will change hands, and Hu naturally wants to get his allies into as many posts as possible. The thought that the president might be cracking down on graft simply because it’s the right thing to do is dismissed.
But what about a third possibility? I’ll call it the Enron option: namely, that when routine corruption gets so out of hand as to be potentially damaging to the system as a whole, somebody has to pay. Consider Chen Liangyu and whoever else goes down with him as the Ken Lay and Jeff Skilling of the Shanghai pension scandal. My theory is that, just like with the Enron scandal, this pension thing got so out of hand and so obvious that somebody had to take the rap, to show the people that the leaders are doing something about corruption. Everybody’s happy: the leaders gain face for upholding justice, the people see that justice has been done; but meanwhile, the system remains as it is and things proceed as they always have, with the powerful exploiting the powerless.
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September 28th, 2006 at 4:37 pm
Are you sure about your “Enron option” Mr Almerindo. Enron was a money making enterprise that collapsed under the weight of its own mismanagement, taking hard-earned pension funds with it. It was not brought down by the government and the subsequent investigation showed that that mismanagement was clearly criminal.
As far as i can tell, no-one has yet shown that the money loaned by the Shanghai Pension Fund to Fuxi Investment has disappeared, and neither of the two have collapsed, although corporate bonds issued by Fuxi this year are now looking like a bad bet.
Although it is clear that the fund did break the law by investing outside of government bonds or the banking sector, there is little evidence that the fund managers were operating principally to line their own pockets.
They possibly took a cut, and Zhang Ronkun, Fuxi’s chairman, certainly made himself rich out of the transaction, but this is normal for any businessman who makes a wise investment that generates returns. In fact, it could well be that the pension fund was better, not worse, off following the tie-up with Fuxi. Unfortunately, given the fund was operating outside of formal financial channels, there is no oversight so we may never know.
Local pension fund managers throughout the country will be losing some sleep right now as the investigation spreads, as will the private businessman that have played a role investing these funds and generating a healthy return.
But i suspect they will not be losing too much sleep, knowing full well that the Shanghai scandal was more a party purge than a corruption clampdown. As long as they don’t flaunt their riches too widely they will be okay.
Perhaps the Shanghai scandal is more like Halliburton. But while Halliburton keeps getting rewarded for mispending US government money, the Shanghai Pension Fund and Fuxi Investment get taken to the cleaners for generating a return on the investment of Shanghai’s soon to be pensioners.