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China's party-business ties grow

China's rapid economic growth has created huge companies, but most of them are owned by the state.

Now the Communist Party is embracing businessmen in its drive to modernise the country - but it faces growing accusations of corruption.

In the provincial town of Liuzhou, 1,200 miles south of Shanghai near the Vietnamese border, town officials held a banquet for GM executives and journalists to celebrate GM's investment in a new engine plant at formerly state-owned Wuling, China's leading maker of small minivans.

Leading the toasts was Liuzhou's most important official, who hailed GM's investment and hoped that more multinationals would invest in Guangxi Province to help boost people's standard of living.

That toastmaster, however, was the head of the province's Communist Party, who is in a battle to gain a growing share of China's booming car industry.

In September, he won a significant victory, when the government named Liuzhou as one of four "designated secondary centres" for the production of auto spare parts - a fast-growing segment of the Chinese auto industry.

State-directed capitalism

The auto industry encapsulates all the strengths and weaknesses of China's state-directed capitalism.

Car production in China is growing so rapidly that it is set to overtake the US within a decade as the world's largest market, and multinationals are flooding in to invest.

But all foreign multinationals must find a Chinese joint-venture company, which takes a majority stake in the business, and nearly all these Chinese companies are state-owned.

In Shanghai, GM was lucky to find Shanghai Automotive (SAIC), China's largest car company, as its partner.

As SAIC was owned by the Shanghai municipal government, it found no difficulty in finding new sites to expand its business in the new Pudong district.

And it had no problems getting suppliers - as the government even owned its own parts company.

The Shanghai government was also instrumental in helping the other early investor in Shanghai Automotive, Volkswagen, with its markets. All 20,000 municipal taxis in Shanghai are Volkswagens and made locally.

In return for its help, the government requires foreign car companies to share their modern technology with the state companies, thus helping them modernise both the production line and introduce new equipment in the cars.

GM has no regrets about its relationship with a state-run, party-controlled business.

GM boss Rick Wagoner says the Chinese managers have a "very professional" approach and that GM has benefited from party backing in smoothing the way for it to produce in China.

Uncontrolled expansion

The symbiotic relationship between foreign multinationals and local party officials also applies even more to overseas Chinese businessmen, who are being enticed to invest back in the mainland.

Much of Shanghai's property boom has been fuelled by Hong Kong Chinese investors, who have built many of the huge shopping malls and skyscrapers that have transformed the city.

And as the Chinese government owns all the land in the city, property developers are sold mere leases, which are auctioned off to the highest bidder.

The profits from the sales go to the municipal government, which has used the money to build the vast new infrastructure of roads, ports, airports and 12 underground lines which has transformed the city.

Until recently, it was relatively easy for the government to clear the land it wanted for development, relocating thousands of Shanghai residents to new housing on the outskirts of the municipal region.

And its control of the planning system meant that there was no conflict, and no delay, over planning permission.

It was in the interest of the government - bent on the expansion of Shanghai - to get the maximum value out of each site's land value, by building high-rise apartments for the rich or commercial office blocks.


But the system also encouraged corruption.

Businessmen were encouraged to join the party, while insider deals were common.

Last September, the secretary of the Shanghai municipal committee of the Communist Party, Chen Liangyu, was sacked from his post for corruption.

He has been accused of diverting money from Shanghai's $1.2bn pension fund to help finance building projects through dummy companies controlled by him and his business allies.

Mr Chen was also implicated in a real estate scandal in 2003 that led to the imprisonment of leading property developer Zhou Zhengyi, once named China's 11th wealthiest individual.

The dismissal and trial of Mr Chen is part of a broader campaign by the Chinese government to stamp out the perception of widespread corruption among party officials.

Revelations have included the denunciation of corrupt officials who kept mistresses while indulging in expensive foreign goods and trips abroad.

The party fears that corruption will undermine the legitimacy of the party, at a time when - despite economic growth - many people are suffering from rapid economic change.

The gap between rich and poor is growing, while state provision of health care and pensions is declining.

But the prosecution is closely linked to a power struggle within the party. As a politburo member, Mr Chen is allied to former leader Jiang Zemin, who strongly backed Shanghai's headlong dash for economic growth.

Unbalanced growth

Beyond the corruption scandals, there is a bigger problem for China's state-directed capitalism.

That is the competition between regions for economic growth and - ironically - the inability of the central government to prevent overexpansion.

Shanghai's premier state-owned company had traditionally been Baosteel, now the world's fifth-largest steelmaker, which also supplies the Shanghai car industry with its basic raw material.

Baosteel has been on an aggressive expansion programme - as have other Chinese steel companies, buying up other companies and listing some of its shares on the Hong Kong market.

It has plans to double steel production again, buying iron ore companies in Brazil and building a huge new plant in Shenzhen, the booming province near Hong Kong.

And those plans were strongly backed by the Shanghai party, which had close ties to Baosteel's boss, also a party member.

But the virtual doubling of steel production by China has led to a glut of steel on the world market, as well as questions as to whether the breakneck expansion can continue.

For now, China's booming economy is absorbing all the steel it can produce, despite the attempts by central government to slow growth by raising interest rates.

But if growth were to slow, the damage to Baosteel's balance sheet and its workforce could be severe.

And then, the competence of the party to run the economy - even with the advice of businessmen - could come under fire.

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