The Shanghai pension scandal has been slowly brewing since Shanghai's Chinese Communist Party (CCP) Secretary Chen Liangyu — possibly hoping to keep investigation of the scandal in-house — vaguely announced in early August that officials needed to display more discipline. Since then, several Shanghai politicians, bureaucrats and businesspeople have been detained, and the central government sent a 100-person team to investigate allegations that the Municipal Labor and Social Security Bureau made illegal loans to private business. Chinese pensions in general have become a subject of social outrage, as official corruption and mismanagement have exacerbated the problem of pension gaps. Some observers predict the gaps, currently around $15 billion, will rise to $110 billion by 2010 because of an increase in the number of retired people and a decrease in the number of workers paying into the system. The Shanghai politicians caught in this scandal rose in power during the third generation of Chinese leadership. Jiang Zemin, a former mayor of Shanghai, became president of China in 1993 and Zhu Rongji, another former Shanghai mayor, became Jiang's premier in 1997. At the same time, Shanghai underwent an explosion of economic growth as the central government began lowering its taxes and encouraging foreign investment. Jiang's supporters have since flourished in this environment, becoming rich and developing influential social networks. It is those social networks that largely control business in Shanghai. In a country where laws of the central government, to have any meaning, must rely on interpretation by local bureaucracies, foreign and domestic investment in Shanghai depends on Jiangist social networks. In turn, local officials become empowered by the reliance on their good works of such a critical part of China's economy. It is exactly those social networks and interconnected officials that have come under investigation in the Shanghai pension scandal. The scandal focuses largely on Zhu Junyi, director of the Labor and Social Security Bureau, who was fired Aug. 11 for lending approximately $400 million to a private toll-road company, Fuxi Investment Holdings. The investigation then led to Zhang Rongkun, Fuxi's chairman and the 16th richest man in China. Zhang also formerly served as head of Shanghai Electric, China's largest industrial equipment manufacturer, and executives from that company were detained for ambiguous violations of party rules. The social network did not stop there. Qin Yu, the head of Shanghai's Baoshan district and a former secretary to CCP chief Chen, was detained. Wu Minglie, formerly a top official and now in charge of a government-controlled real estate company, is also a subject of the investigation. It is not certain whether Wu was tied to Fuxi or received separate loans. These events conveniently began playing out two months before the CCP Central Committee's Sixth Plenum, a pivotal event in Chinese politics. The plenum will set the stage for the CCP's 17th National Congress, which is expected to select the successor to President Hu Jintao, and will be the first time that Hu can really hand-pick the leadership since coming into power. Thus the plenum has the potential to set the tone for the next generation of China's political leadership. Political horse-trading should begin in earnest at the plenum, and the Jiangist supporters of further economic liberalization may succumb to Hu's supporters of reform and inland development. Shanghai party chief Chen, who followed in the footsteps of Jiang and Zhu as mayor of Shanghai, has yet to be named in the investigation but may find himself discredited and his career stalled because of the scandal. This would end the tradition of Shanghai mayors advancing to Beijing. The political career of Vice Premier Huang Ju may also stall. A member of the Shanghai gang who is linked to the scandal through his younger brother's involvement with Fuxi, Huang has been associated with an internal power struggle since early this year. If the Shanghai gang cannot use its political clout to escape the pension scandal, the resulting change in the city's bureaucracy will leave businesses scrambling to build new social networks in an uncertain environment, the kind of environment that businesses despise. Businesses would have to woo the new officials and gain some understanding of how they intended to interpret the laws. Hu's conservative supporters could possibly reign in development in support of Beijing's strategy to encourage development further inland. This would be a wise move for Hu, whose policies become easier to enforce if his people control Shanghai. China's largest city and the country's economic engine, Shanghai presents a large obstacle to the trend of shifting development inland and slowing liberalization. Such a shift in Shanghai power would also signal the price of non-compliance to officials in other powerhouse provinces such as Guangdong and Shandong. without directly confronting them. With scandal and corruption rife throughout China, excuses abound for teaching local officials to walk the party line.