By Maureen Fan
Washington Post Foreign Service
Saturday, September 6, 2008

BEIJING, Sept. 5 -- Tens of thousands of angry protesters, many of whom lost their life savings in illegal investment schemes run by legitimate real estate and mining companies, clashed with police this week in Hunan province, residents and news agencies reported Friday.

Crowds in Jishou city blocked traffic and trains Wednesday and Thursday and gathered in front of government offices demanding the return of their money.

Corruption is endemic in China as the country gains in affluence. Last month, China's top auditor said that 10 central government departments misused or embezzled $660 million in 117 cases last year. Mindful that the public is increasingly intolerant of such practices, President Hu Jintao has in recent years waged a high-profile campaign against corruption.

On Friday, in a gesture against graft in the armed forces, China's official media reported that senior military officers in charge of big projects and budgets will be promoted or booted based on how well they manage their economic responsibilities.

At the same time, the government employs force against people protesting corruption. In Hunan, officials have put the People's Armed Police Force on the streets where investors are demonstrating and have sent out the provincial head of public security, according to the Web sites of Hong Kong's Sing Tao newspaper and the state-run news agency, http://www.chinanews.com.

Since 2004, high-return investment schemes have been a popular way for real estate and mining companies and even local associations of private businesses to raise money. Typically, they offer investors returns of 3 to 10 percent a month, as compared with bank account interest rates of about 5 percent a year. The funds collapse when investors panic and demand their money back en masse.

"Over 90 percent of the people in Jishou have participated in these programs," said a Jishou shopkeeper who gave his surname as Luo and said he invested $11,428 in Sanguan Real Estate Co. for a return of 5 percent, or $571 each month. "Before the Olympic Games, some government officials already told me to get my money out quickly, otherwise I'd be in trouble." But Luo believed he could afford to risk the money and now can't get his money back.

Luo said other victims included laid-off workers investing their pensions and farmers who had sold their land to developers and therefore had no other way to earn a living. Some elderly residents even sold their coffins to participate, residents said. The chairman of the board of one real estate company, Fuda, was a well-known local entrepreneur and a member of the local political consultative congress, according to the Sing Tao Web site. Nearly 40 companies raised about $1 billion this way, but beginning in July, when some companies had difficulty repaying, people began to panic.

This week, demonstrators began arriving at Jishou railroad station about 10 p.m. Wednesday, a receptionist at a hotel near the station said. From nearly midnight until 8 p.m. Thursday, "there were no trains coming in or out because of the protest," the woman said, declining to give her name.

An electrician at another hotel near the train station gave his surname as Mo and said he had invested $7,142 in April, comprising his life savings, his family's savings and $1,428 borrowed from friends. He was promised an interest rate of 6 percent a month.

"I don't know what to do now," Mo added. "Although the government mobilized soldiers and stopped the protest, people will not remain silent. They will continue to fight for their rights."

The new audit rules for the People's Liberation Army, which includes the army, navy, air force and the People's Armed Police, are designed to root out corruption, extravagance and waste at the top levels of the military, according to front page articles in the People's Daily, the official mouthpiece of the Communist Party, and in the Liberation Army Daily, the PLA's newspaper.

The audit results, which will categorize officials as excellent, good, mediocre and poor, follow more general regulations announced last year. They are part of a campaign to professionalize the military and prevent cases such as a major embezzlement scheme by the deputy commander of the navy two years ago.

"We should use the audit results to evaluate the officials and determine how they are promoted," the Liberation Daily news article said. "People who perform badly in their economic responsibilities, their positions should be changed. They cannot be regarded as officers with potential."

"The release of this opinion demonstrates that the PLA thinks it should be a role model in society, but under a market economy sometimes PLA officials are sometimes influenced by financial gain," said one Beijing-based senior PLA officer and researcher who argued that the new rules are preemptive.

For years, the PLA was allowed to run companies, but in 1998, the government began to rein in that practice.

"Before, the government allowed the military to do business, so there was a lot of corruption," said Hu Xingdou, an economics professor at the Beijing Institute of Technology who studies corruption and says the military should be audited not by itself but by an agency under the national legislature.

"Right now, it is very hard to reform the audit procedures," Hu said. "So the PLA has to strengthen their auditing themselves. If the army is corrupt, they cannot protect the country."

Researchers Zhang Jie and Liu Songjie contributed to this report.