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FEBRUARY 7, 2000 VOL. 155 NO. 5

Fall of an Empire
A high-level smuggling scandal lays bare the corruption that is plaguing the People's Republic

Fritz Hoffmann/Network Photographers for TIME
The stalled construction site for the 88-story Yuanhua International Centre.

When they sold their cars in 1994, China's ruling élite had a point to make. Current and former premiers Zhu Rongji and Li Peng, among others, traded in their Mercedes stretch limousines not because they preferred more demure Audis, but to set an ascetic example for a Communist Party grown fat on perks and a half-century of untrammeled power. Ordinary Chinese appreciated the gesture. Businessman Lai Changxing appreciated the opportunity: he snapped up Li's former ride at a state auction and used the sleek limo to chauffeur favored--and impressed--contacts around the bustling port city of Xiamen in Fujian province.

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Only now is Lai learning the intended lesson, for his ostentatious ways have landed him squarely in the middle of the biggest corruption scandal in the history of the People's Republic. For the past five months, hundreds of investigators from Beijing have flooded Xiamen, taking apart a shadowy operation that they say smuggled nearly $10 billion of oil, cars, mobile phones, cigarettes, rubber and guns into China. The chief of police, head of customs and dozens of other local, party and military officials have been hauled into custody. Others--including alleged mastermind Lai and a vice mayor--have fled overseas. In Beijing, a member of the Politburo and protégé of President Jiang Zemin was initially reported to have divorced his wife before she was arrested for involvement in the smuggling ring. The rot in Xiamen runs so deep that the crackdown itself could even pose a threat to Beijing.

The scandal is emerging as a lesson in capitalism's excesses as practiced in the Middle Kingdom--a Horatio Alger tale with Chinese characteristics. "Lai was an illiterate peasant," says a Xiamen lawyer who has met Lai several times. But the Fujian native quickly learned how to exploit China's stop-start flirtation with free enterprise. Running his first business in the early 1980s, at a time when most Chinese could only dream of foreign-made goods, he tempted clients by giving away imported leather briefcases. As the scale of his operations grew, so did the gifts: lavish banquets, prostitutes, jobs for relatives, mountains of cold, hard cash. After he established a base for his Yuanhua group of companies in Hong Kong in 1994, according to a source in Xiamen's business community, Lai routinely handed out thousands of dollars to visiting mainland officials to ensure their loyalty. "Each of them, whether a mayor or a division head, would get the same amount," says the source. "That way if one official retired or was sacked, Lai would still have ties to the subordinate who replaced him."

Investigators suspect that Lai, who spent a total of $21 million on a luxury apartment and offices occupying two floors of a Hong Kong skyscraper, used the former colony as a transfer point for goods that were then smuggled by ship into Xiamen, the deepwater port directly opposite Taiwan. The operation would have required even larger kickbacks: Lai allegedly paid huge bribes to officials for import licenses, possibly including to Lin Youfang, wife of Beijing party chief and Politburo member Jia Qinglin. (Lin, who has denied the charge, ran the largest state-owned import-export firm in Xiamen while her husband served as local party chief; in 1995 he was transferred to Beijing to replace the disgraced Chen Xitong, who was brought down in a corruption scandal of his own.) Navy ships reportedly escorted Lai's cargoes; when the net began to close in last fall, Xiamen sources say that the city's police chief alerted him in time to flee. The smuggler oiled these relationships with money and the girls at his Red House--a private club set in Yuanhua's corporate compound.

That Lai commanded respect in Xiamen--where he bought the city's soccer team, built a 30-story hotel and planned to build its tallest building, an 88-story office complex--is clear from the awed tone in which his exploits are recounted. According to the Xiamen lawyer, local trade officials once seized a shipment of Lai's black-market cigarettes; he simply phoned an army friend, who dispatched a squad of soldiers to recover the consignment and beat up the officials. On another occasion, when a customs officer rebuffed Lai, he arranged to have the man entertained by a prostitute at a Xiamen karaoke bar. Then he had police raid the place. "Lai came to the man's rescue and offered to get him off the hook if he came to work for him," recalls a Xiamen source familiar with the case.

But if Lai was audacious, he wasn't unique. Smuggling is rampant up and down the Chinese coast. As a result, many in Xiamen don't understand why Lai was singled out for investigation. "What's wrong with selling smuggled petrol?" says a local taxi driver, noting that the price of gasoline has risen by nearly 50 cents since the crackdown began. "It's not like smuggling drugs." Xiamen has a long history as a smugglers' paradise: four hundred years ago, when the city was known as Amoy, merchants bribed Ming eunuchs to allow foreign goods through the port. Only when traders balked at paying kickbacks were they branded pirates, and imperial troops sent to punish them.

Lai, too, may have thought himself too powerful to be touched. At one point his oil accounted for a sizable chunk of the Fujian market and cost half the official rate. He was eluding millions of dollars in tariffs on his shipments, at a time when the famously incorruptible Zhu was under pressure to ease the burden on the millions of state employees his reforms were putting out of work. According to one version of events, Zhu began investigating Lai after visiting Xiamen in early 1998, just before taking up his post as Prime Minister. Lai sent him a lavish package of gifts, which prompted Zhu to ask: "What kind of person can afford to send such expensive things?" Some say that angry state petroleum companies raised the alarm; others that one of Lai's deputies--upset that Lai wouldn't pay his gambling debts--ratted on him. One Hong Kong report says that Lai tried to bribe Zhu directly, which prompted the infuriated Premier to order his arrest.

Nabbing Lai has proven impossible. Xiamen law enforcers, says a local professor, "were the lawbreakers themselves." Everyone from the army and navy brass who work in the city because of its proximity to Taiwan, to civilian bureaucrats, to top party officials had a hand in Lai's cookie jar and an incentive to thwart investigators. The team dispatched last August from Beijing's secretive Central Commission for Discipline Inspection met a wall of uncooperative witnesses and outright harassment. Xiamen security officials tapped the agents' phones, allegedly warning Lai and other suspects before they were arrested. That reportedly prompted team leader Liu Liying, the woman who helped bring down former Beijing party chief Chen, to call in the big guns. Zhu turned to Jiang for help, and the investigation quickly gathered steam.

The Chinese President has good reason to come down hard on Xiamen. Since 1998, Jiang and others have warned that official corruption--one of the primary complaints of the student protesters who filled Tiananmen Square in 1989--may pose the greatest threat to the Communist Party's grip on power. "Corruption is the root cause of the lack of trust and respect for the Chinese leadership," says Joseph Cheng, a political scientist at the City University of Hong Kong. (In 1999, corruption replaced unemployment and social disorder as the issue that concerned Chinese most, according to a poll conducted by Beijing firm Horizon Market Research.) By some estimates smugglers are costing the government as much as $12 billion a year in unpaid tariffs; an additional $15 billion may be lost to embezzlement.

Periodic crackdowns, however, cannot hope to solve the problem. Authorities say they punished 132,447 corrupt officials last year, including 17 at the ministerial level. In one high-profile case in Guangdong province, six officials were executed for evading a combined $400 million in taxes. However, discipline commission chief Wei Jianxing said recently: "Rampant corruption has not been effectively curbed, and the situation remains severe." Indeed, it's hard to see how things can change unless China overhauls its political and economic system. Under the current regime, artificially high prices tempt black marketeers to sell illicit goods for less. The need for licenses will tempt those who dole them out to demand bribes.

Jiang and his lieutenants, however, are tackling graft precisely to avoid implementing more substantial political reforms. In the past year, with official encouragement, dozens of websites have been set up across the country for citizens to report instances of local corruption. Last week, as Beijing published stringent guidelines on the dissemination of "state secrets" over the Net, it warned sites against posting leaks from the Xiamen investigation. The new wariness may be a sign that the scandal is veering too close to Jiang himself, given the persistent rumors about Jia and his wife Lin. Last week the President posed for the cameras in Haidian, Beijing's "Silicon Valley" district, with Jia by his side, and Lin later appeared on Hong Kong television to deny that she had been arrested, or even divorced. The support may mean that the investigation has gone as far as top officials want it to go. If so, Beijing may have made one point only to miss another.

Reported by Jaime A. FlorCruz/Xiamen and Wendy Kan/Hong Kong

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