China’s Fractures Widen: Now Comes The Night Of The Long Knives, Red Capitalism Version

“Pursuing reform in the face of vested interests is akin to stirring the soul” – Li Keqiang, Premier of China

“We must eliminate evil members of the herd.” — Xi Jinping, President of China

Between June 30 and July 2 of 1934, the Nazis carried out a series of political murders in what was called the Night of the Long Knives. A version of this large-scale purge is underway in China right now, starting with this week’s trial of Liu Han. Liu is accused of murder, among other crimes, and of being part of the “Triad” gang along with 35 others.


The coverage of this trial and other investigations and arrests is being fully covered by the Chinese state media. This article from the English edition of the South China Morning Post lays out in strong language the case against Liu Han. President Xi Jinping’s crackdown  is also being promoted through social media. It is effectively using tools like Weibo, China’s equivalent of Twitter, and WeChat to rally public opinion around the party’s anti-graft efforts.

I will be writing more about China’s new leaders in WinterActionables in the near future. For now, it suffices to say that China’s new Premier Li Keqiang is as close to a choir boy as this system can muster. Xi himself has managed to avoid serious corruption claims in his career. Therefore, these new leaders apparently feel the time has come to lay out China’s dirty linen for all to see, especially that of political opponents and specifically the “Shanghai Gang.”

I expect this will also involve the recovery or claw-backs of loot scammed from auntie’s wealth management products and seizures (as opposed to bailouts) as restitution of the ill-gotten gains of the kleptocrats — or at least those not well connected with the new Xi regime. Xi Jinping is also going to personally chair and oversee the shadow banking reform committee. Normally this is chaired by the premier or a more junior official, so it seems a clear signal that Beijing intends to get its shadow bank lending under direct control. Li Keqiang, in a speech in March, indicated a willingness to allow “selective” corporate defaults, no doubt as an instrument to rein in state enterprises,  control power,  implement reform and settle scores.  Unless it fits one of the four following categories, stimulus and bailouts would be small.

– Building the social safety net
– Environmental projects
– Social housing, hospitals, schools, water treatment, urban public transport
– Agricultural modernization

The new leadership’s purge is largely directed at the power players called the Shanghai Gang. This is an element of Jiang Zemin’s old power base. Jiang was President of China between 1993 and 2003.  Jiang, who is now 87 and was generally considered a stooge and flower pot even when in office, is almost begging for mercy now. Chinese social media, however, is relentless in calling for his head and the end to the Shanghai Gang. This report from China’s version of “alternative media” is illustrative.  It passes the censors mocks Zemin and  accuses him of being involved in “live organ harvesting” and of “hanging out with Henry Kissinger.”

The Liu Han trial is the next salvo in the offensive that is really directed at the titular head of the highly corrupt Shanghai Gang, Zhou Yongkang. The Xi Jinping power structure emanates from a group called the “Chinese Youth League Gang.” Premier Li Keqiang headed the League from 1993 to 1998 and is drawing his associates into the power structure. This structure has been rapidly replacing the prior security and police forces with an aggressive anti-corruption cadre since coming to power in 2013. Li has urged auditors to be “brave in thoroughly probing violations [of the law].”

Zhou Yongkang is now retired, primarily as the fallout from his association with now-jailed Bo Xilai. There are claims he didn’t go without a fight and tried to have Xi assassinated during the party Congress when the successor was being selected. From 2007 to 2012 Zhou headed the powerful Politics and Law Commission, which oversaw all courts and police forces in China. As such, he was in a position to cover up all kinds of kleptocrat criminality in China. He facilitated a “strike black” campaign in Chongqing with now-convicted ally, Bo Xilai. This was little more than  Mafia-style shakedowns of private business people. Zhou was also one of only nine members on the Politburo Standing Committee.

Zhou is under investigation and the net is closing rapidly. He is joining at least three of his former senior security officials, including two vice-ministers and the man who oversaw Beijing’s internal listening apparatus. A total of $14.6 billlion in assets have also been seized.

It sounds like the “court of public opinion” has ruled. One of China’s main newspapers put it succinctly:

But doubts about Zhou’s fate have now been dispelled by a recent flurry of uncensored news stories in the Chinese media that revealed shocking details of corruption involving Zhou’s family and former subordinates. It has been reported that the authorities recently searched the homes of Zhou’s two brothers. Though these stories have yet to implicate Zhou directly, it will only be a matter of time before the Chinese government officially charges him with corruption.

“Whispered reports are even more lurid. Zhou is said to have plotted to murder his first wife, and there are rumours that at the height of last year’s scandal involving disgraced former Chongqing party boss Bo Xilai , he attempted to assassinate Xi in the leadership compound at Zhongnanhai.

“Based on what the Chinese press has disclosed thus far, it is clear that the Zhou case will be the ugliest and most sensational scandal involving a senior party leader that the country has ever seen. It will make Bo, an ally of Zhou and a former Politburo member who was sentenced to life imprisonment for corruption, look like a petty thief.”

Nationwide, hundreds of thousands of people must have been caught up in the dragnet, based on the 11,879 people investigated in Shanxi Province alone. The heads of Chengdu Bank and a local investment corporation have been detained. In his long career, Zhou has headed or helped promote all of China’s big oilfields – Daqing, Liaohe and Shengli — and the gasfields of Tarim and Sichuan basins. At least six senior executives at oil company CNPC, including Jiang Jiemin, former CNPC head and head of the state assets watchdog, have been detained since August 2013.

Shen Dingcheng, the party chief and vice-president of PetroChina International, disappeared shortly before the Lunar New Year holiday, the China Business Journal reported, citing an anonymous source. The Journal also highlighted Shen’s links with three other former secretaries to Zhou and even described Shen as being part of a “gang of four” secretaries. The other former secretaries are ex-CNPC deputy general manager Li Hualin; former deputy Hainan; governor Ji Wenlin; and the former chairman of the Federation of Literary and Art Circles in Sichuan, Guo Yongxiang. Several members of Zhou’s former inner circle have also been rumored to be under investigation or have already been detained, including Sichuan officials Li Chuncheng and Li Chongxi.

Although not now put directly in the Night of the Long Knives list, there is enough of a purge of the military underway to keep those actors in line and wary. Xi compares it to going after tigers and flies. These are scary times for the corrupt kleptocrats of China indeed.