Economy, Talking Point

China’s most wanted?

Why some of the nation’s richest men have been caught in bribery scandals

China’s most wanted?

Gome founder Huang Guangyu in happier times

Wasn’t getting rich supposed to be glorious, in Deng Xiaoping’s view? Yes, and on the face of it, this should make inclusion in the three leading China “rich lists” publications – one produced by Forbes magazine, and the other two by Chinese magazines, New Fortune and the Hurun Report – something of a celebration.

Not as far as many of the plutocrats who figure in the listings are concerned.

In fact, most would prefer not to be mentioned at all, especially in light of the more colloquial name given to the annual publications – the “pig killing lists”.

The inference is that any pig fat enough to be worthy of mention is probably ready for the slaughterhouse. Or more accurately for the jailhouse. Indeed, it is true that recent lists have served as decent indicators of trouble ahead.

The most recent case is the arrest of Huang Guangyu, twice China’s richest man and the founder of Gome, a home appliance chain, who is currently awaiting trial for stock manipulation.

His fall from grace refreshes the Chinese adage that “a big tree attracts big winds” and it reminds the rich list elite one more time that great fortune can lead as easily to gaol as to glory.

What has Huang done wrong?

Huang started out hawking watches in Mongolia and went on to build Gome into a home appliance empire. He was always an aggressive, risk-taking operator, with a reputation as the “Price Butcher”. But he was also the nation’s richest entrepreneur – his personal worth last year was estimated at $6.3 billion, by the Hurun Report.

After surviving an initial investigation into tax dealings and potential loan fraud in 2006, Huang was arrested again in November 2008 on charges of stock manipulation. Other “economic crimes” have since been added to the investigation, including money laundering.

In April the scandal deepened with the arrest of two senior officials in Huang’s home province of Guangdong, the former head of the Economic Crime Investigation Bureau and the former head of the party’s provincial Disciplinary Committee. Both men were previously tasked with rooting out corruption. The allegation is that they had accepted bribes from Huang.

So there is a political link to all of this?

There usually is – and most commentators refer to it as a problem of “original sin.” In the mid 1980s, when many of the entrepreneurs began to set up the companies that have since made them rich, the business landscape was a treacherous one. Many of the rules and regulations were left deliberately unclear, as well as easily circumvented.

The state had a monopoly of resources, especially in permits, land and loans. So to get ahead, entrepreneurs needed to reach agreement with local officials.

The deals struck on the way to the top were not always ones that the Hong Kong or New York listed firms of today could repeat. But they were struck nonetheless and they have left a hidden legacy of sharp and sometimes dubious practice.

As a result, few of China’s billionaires are assumed to have emerged from the unregulated past with whiter-than-white reputations.

This also means that many are regarded as ripe for investigation – sword-of-Damocles style ­– if the authorities decide to swoop.

And many on the Rich List end up being investigated?

Yes, with many also convicted for offences including fraud, financial irregularities, tax evasion and bribery.

Those who get carried away by their initial success seem especially likely to be hauled into the courts. Yang Rong is one such example. Third on the rich list in 2001, he set up Brilliance China Automotive, a leading manufacturer of minibuses and the first Chinese company to float on the New York Stock Exchange in 1992.

But he then got involved in a spat with the Liaoning local government, over an equity stake in the company, and he threatened to relocate his operations, boasting publicly that he had never got a cent from the government and that he owed it nothing in return.

The response was immediate. Yang was declared to have no claim on Brilliance’s state-owned assets, and was accused of economic crimes for good measure. Fearing arrest, he fled to the US.

Another Yang (Yang Bin, from Shenyang) provides a similar story. After finding fame as the Tulip King (he made his fortune in horticulture), Yang made it to second place on the Forbes list in 2001, with the listing of Euro-Asia Agricultural Holdings in Hong Kong.

He then overreached, with an announcement that he would transform Shenyang into “the breadbasket of north east Asia”. Instead, most of his focus seemed to go into real estate projects, including a “Holland Village” leisure park of windmills, canals and a life size replica of the Amsterdam railway station.

This did not go down well with Euro-Asia investors, who worried that company funds were being diverted illegally. Under financial pressure, Yang changed tack and he shocked local authorities by announcing a joint venture with an unlikely partner – the Dear Leader Kim Jong Il – in which he intended to serve as governor of a new development zone in Sinuiju, just across the North Korean border. “I am now an international diplomat and political leader,” Yang added.

In fact, he was heading for prison. Within a few months, Yang was to be sentenced to 18 years for tax evasion.

So loose talk loses fortunes. But today’s tycoons are more careful?

The smarter ones now want to keep the lowest possible profile.

Take China’s newest billionaire, Liu Zhongtian, the chairman and largest individual shareholder of China Zhongwang, an aluminium extrusion business that floated in Hong Kong at the beginning of May.

Liu is probably now China’s richest man, with a personal stake worth $3.5 billion. But he looked awkward at the media event that followed the IPO, raising a glass of champagne cautiously to camera and offering only a brief smile.

Liu’s political links are also good ones. He was named a National Model Worker by the State Council in 2000, and is also one of the entrepreneurs bestowed with the “Constructor of Socialism with Chinese Characteristics” accolade. Presumably not titles that he bothers to include on the English-language version of his business card.

So the bureaucrats have the whip hand?

The relationship between officialdom and the private sector is a complex one. But it would be wrong to believe that there is an unspoken ambition to purge China’s billionaires.

In fact, traditional attitudes that once regarded private capital as an enemy of the state have long since disappeared. And many of China’s billionaires are the children of senior officials – as many as 90% if a 2006 study is correct. (The Hong Kong-based Singtao Daily says it was conducted by the Research Office of the State Council, the China Academy of Social Science, and the Research Office of the Party School.)

More broadly, Beijing needs the private sector to power China’s economic growth. Private businesses now make up more than three quarters of the country’s GDP and generate millions of jobs.

So “them and us” analogies are problematic. In fact, the Communist Party lifted its ban on business people becoming members in 2003 and it is now estimated that almost 30% of the richest entrepreneurs are party members, compared to only 5% of the general population.

So, a new survival strategy for the rich list? Perhaps. It also raises questions of the Westernised view that economic development must eventually lead to the disintegration of China’s current ruling structure. There may be alternative outcomes, in which the political and business elites find a different path.

But in the meantime the best advice to the rich-listers is simpler stuff: avoid hubris, pay your taxes and manage your businesses as prudently as possible.

To get rich may be glorious but to crow about it certainly isn’t.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.