The top Communist Party official in Shanghai has been sacked for his part in a pension fund scandal that has rocked China's largest city and is expected to have consequences for the leadership of the country as a whole.

Chen Liangyu, the Communist Party Secretary for Shanghai, was dismissed from his post and removed from the central party's Politburo this morning for allegedly misusing the city's 10 billion yuan (£664 million) social security fund. Mr Chen is the most senior official to be fired for corruption for more than a decade.

More than 100 investigators were despatched from Communist Party headquarters in Beijing to Shanghai last month to look into the siphoning of hundreds of millions of yuan from the city's pension fund into illegal loans and personal investments by government officials. More than a third of the fund is reported to have been used illicitly.

Until today, the most senior casualty of the investigation was Qin Yu, one of Shanghai's 19 district governors who once worked a personal secretary to Mr Chen when he was Shanghai's Mayor. Zhu Junyi, the head of the city's Social Security Bureau, and Zhang Rongkun, the owner of a road toll company and one of China's richest men, are also under investigation.

As well as suggesting endemic corruption in China's financial centre, the scandal has also been interpreted as an attempt by Hu Jintao, the Chinese President, to assert control over the city and to assure the nomination of one of his own proteges as his heir at the party's next five-yearly congress in late 2007.

China's last president, Jiang Zemin, retired to Shanghai in 2002 and has since built up a powerbase of officials loyal to him.

As a member of the Politburo and a possible contender for overall leadership of the party, Mr Chen, 59, was a senior figure in the so-called "Shanghai faction" and seen as a close ally of Mr Jiang. He was reported to have clashed with the central party leadership earlier this year over Beijing's economic policies.

His dismissal allows Mr Hu a free hand in one of the last reshuffles before next year's congress: a meeting of 300 or so members of the party's Central Committee next month.

Xinhua, the Chinese state news outlet, reported today that Mr Chen had been sacked for furthering "economic interests for illegal entrepreneurs, protecting his staff who severely violated laws and discipline [and] furthering the interests of family members by taking advantage of his official posts".

"Whenever an official violated discipline and laws, regardless of name or rank, he or she would be severely punished," Xinhua quoted the Communist Party anti-corruption committee saying.

But observers of the machinations at the top echelons of the Communist Party said Mr Chen's removal was a sign of Mr Hu's growing confidence and intention to take control of the party. "This looks like Hu Jintao is getting ready to take some pretty major steps," said Li Datong, a journalist at the China Youth Daily newspaper.

The last Politburo member to be prosecuted for corruption was Chen Xitong, the former party secretary in Beijing. He was sentenced to 16 years in prison in 1995 and quietly released earlier this year on medical parole.

Times Recommends

• Fish and chip shops ‘selling cobbler as cod’
• T in the Park festival at Kinross
• Body Watch