The last few months have been an unfortunate time for Shanghai. It has been reported that the administration of public funds has not been strong, and in some cases eerily murky, in a city supposedly an expert in financial management.

Obviously, there remains a wide gap between reality and the municipal leaders' pledge, which they first made in the mid-1990s, about building the city into an international financial centre. Much has to be done to raise its overall standard.

However since Shanghai is indisputably the financial centre of China, and is running China's most sophisticated money systems, the recent scandals have an important lesson for the whole nation. There are also valuable lessons for the overseas merchants who tend to size up their opportunities, in trade or in investment, by looking at the things going on in the financial industry.

Stories about Shanghai have just kept unfolding. In the beginning, there were reports the city's social security funds had been misappropriated. More information revealed a full-scale scandal. The funds had been loaned, but not through proper channels, to some local officials' friends in business.

As a result, the former secretary of the municipal committee of the Party, along with several of his colleagues, were sacked.

However last week, a report in the Chinese-language press alleged there were also big holes in the city's public medical insurance funds. These disturbing reports are only in Shanghai, and only about the administration of two public funds.

What about the public funds in other provinces and under the administration by other government offices? Nationwide, there has yet to be a basic set of figures available, let alone regularly updated information.

If there is a gap between Shanghai's mission statement and its actual performance, in other provinces and cities, there may be a much longer distance for public fund administrations to catch up with the standard of the international practice.

Of course, whenever problems such as those in Shanghai are exposed, it is important to name the individuals responsible for them, and hold them accountable for their poor service. More importantly, a stronger system to police the use of the public funds must be developed. These funds are now held by separate government offices, central and local, in separate accounts - retirement (social security), medical and housing.

Proper channels must be developed at the same time for the money in those accounts to be used as investment money - by managers with proven integrity and expertise.

Requirement of full disclosure, independent auditing, strict prohibition of political interference, and supervision by central government regulators are all indispensable parts of the system.

This is the single, most important piece of work to be carried out in order to lay the ground-work for China to advance its development programme under the brand name of harmonious society.

Poor administration of public funds can hurt many citizens and their families. Corruption, such as fund misuses and embezzlements, can be the worst destructive force to the government's credibility and society's harmony.

Right now, when the "harmonious society" programme is being pushed forward, and concurrently, grass-roots governments are having their elections, it would make sense for China to make it a central task to build a more reliable system of public fund administration, rather than simply building more banks and urban financial districts.

The Chinese people need to watch, discuss, and manage their public money more attentively.

The scandal in Shanghai may well serve as a timely lesson and a new starting point.

(China Daily 11/06/2006 page4)