Behind Shanghai

Staring at the rubble of his neighbors' row houses, Chen Guo-fang says he won't budge. Like more than a hundred residents who protested outside Shanghai's city hall last week, Chen is one of 2,000 homeowners who say that collusion between city officials and a big developer cleared the way for the reportedly $600 million housing project that is now bulldozing their homes. It's the biggest scandal to hit Shanghai in decades, and the victims demand fair compensation. "They can break my fingers but I won't sign any papers," says Chen, a 53-year-old laid-off engineer. "I don't have anything to lose."

At first glance, the scandal enveloping Shanghai Land Holdings sounds like business as usual in post-Mao China. The country's embrace of "cowboy capitalism" has triggered corruption probes from Shenyang to Xiamen to Beijing. But look again: the Shanghai investigation appears to have got off the ground with a letter from the angry homeowners to President Hu Jintao, who is emerging as a powerful, even popular leader far sooner than anyone predicted.

Only eight months ago Hu, 60, replaced the far older, more powerful and charismatic Jiang Zemin as Communist Party leader. The smart bet was that Jiang would continue to run things through allies he had brought to power from his home base in Shanghai. But as the SARS crisis unfolded in April, Jiang stayed so quiet some Chinese joked that he was hiding, while Hu and his ally, Prime Minister Wen Jiabao, used the crisis to prove themselves "and win mass support," says Chinese author Ma Ling. Ma has since shortened a planned trilogy on top leaders to include only Hu and Wen, dropping a member of Jiang's "Shanghai Faction" on the ground that he is no longer so relevant.

Hu has been championing leadership accountability--not exactly a strong point of previous communist czars. In early June the Navy's top two officers and a dozen seamen were sacked after a submarine disaster that killed 70 Chinese sailors. "Hu pushed hard to have the two vice admirals fired," says a well-connected party source. Jiang, who remains head of the powerful Central Military Commission, was said initially to favor covering up the catastrophe.

Hu's government also startled many with its response to the death in police custody of 27-year-old graphics designer Sun Zhigang, a university graduate from Wuhan. Detained by Guangzhou police in March because he wasn't carrying a temporary resident permit, Sun received a fatal beating in jail. The nation exploded with outrage. Authorities responded quickly, handing out sentences ranging from three years in prison to death for 17 people implicated in the killing. Then last week the government repealed the regulation that set the stage for Sun's death. Under the 1982 rule on the "detention and deportation of vagrants and beggars," an estimated 3.2 million Chinese were detained in 2001 alone. "This single case has helped bring about a more open government," said Beijing lawyer Wu Ge. "This is great."

Hu's mettle will be tested in the Shanghai scandal. At its heart is Zhou Zhengyi, a high flier whom Forbes had ranked as China's 11th richest man. In early June, Zhou was placed under house arrest on charges of using fraudulent means to obtain $270 million in loans, which he used to gain control of 75 percent of Shanghai Land Holdings in June 2002. His financier was Liu Jinbao, who was recently transferred out of his post at the Bank of China. The two were known to rub elbows with city officials including former mayor Huang Ju, a member of the Shanghai Faction who reputedly helped build a lavish "quasi retirement" villa for Jiang Zemin. Beijing has sent 100 investigators to Shanghai, and NEWSWEEK has learned that eight officials in a district where Zhou bought land for below-market prices are being questioned in detention.

The buzz about Hu as a budding reformer is getting perilously loud. Scholars trumpet reports that he's considering granting private business the same property rights as state enterprises. Party insiders say Hu will use a July 1 speech to call for a degree of democratization, including direct election of grass-roots party representatives. Indeed, some reformers say that if he keeps moving this fast, he could end up like former Russian president Mikhail Gorbachev--a reformer who couldn't survive the expectations he created.