China Discloses Profiteering Scandal

China on Wednesday disclosed the existence of an unprecedented multimillion-dollar scandal in which Communist Party and government officials were implicated.

After a series of investigations, authorities said they had found that officials on Hainan Island off the South China coast--which has the status of a duty-free port--last year encouraged the creation of private companies to import consumer goods from abroad and resell them inside China for huge profits.

The details of the scandal were made public Wednesday in an official report from the Chinese Communist Party’s Central Commission for Discipline Inspection to the party’s Central Committee and the State Council, which is China’s Cabinet. They provide the most graphic evidence to date of the corruption that has cropped up over the last year as China has sought to carve out a new private sector within its state-controlled economy.

May Extend to Peking

The commission’s report also suggested that the scandal may extend beyond Hainan Island and may affect some officials in Peking. “The web of corruption spreading across China and involving some central departments must be investigated,” the report said.

The sums of money involved were far larger than any reported in previous accounts of corruption in China. Investigators found that local bank branches on Hainan had charged illegal fees for the issuance of 4.2 billion yuan (about $1.5 billion) in loans. At least 2 billion yuan ($700 million) of these loans have not yet been repaid.

According to authorities, much of the money was used to set up private firms that purchased an estimated $570 million in foreign exchange. With the foreign currency, the companies bought cars, motorcycles, television sets and video recorders and resold them elsewhere in China at huge markups. The profits and the bank fees were used to pay illegal bonuses to government officials.

Deputy Party Chief Fired

Authorities announced that as a result of the investigation, Lei Yu, the head of the Hainan government and vice secretary of the Communist Party on Hainan, has been fired. Lei, who is in his 40s, had been installed on Hainan by authorities in Peking and Canton to help spur economic development on the island.

The accounts released did not say to what extent Lei was involved in the scandal. But the investigators’ report said that between Jan. 1, 1984, and March 5, 1985, unnamed Hainan officials approved the importation of 89,000 motor vehicles, 2.9 million TV sets, 250,000 video recorders and 122,000 motorcycles to Hainan.

According to an account by the New China News Agency, unnamed Communist Party and government officials on Hainan “repeatedly advocated” that new private companies be established to import consumer goods from overseas and resell them.

Party Leader Warned

“Eighty-eight of the 94 departments under the (Hainan government) administration were involved in the scandal,” the Chinese news agency reported. It said that Chen Yuyi, deputy director of the Hainan government, was also fired and that Hainan’s Communist Party secretary, Yao Wenxu, was given a “serious warning.”

Over the last eight months, a number of reports have surfaced about corruption and profiteering on Hainan. In November, the Hong Kong-based magazine Cheng Ming published a long report called “The Raging Waves of Automobiles on Hainan.”