Shenzhen sins

Still flying, although minus its major shareholder

Does corporate China have more villains than Gotham City? The detention of Li Zeyuan last week for “economic crimes” was the latest in an increasingly long list of entrepreneurial arrests.

In Li’s case, memories of another case – the arrest of Guan Guoliang – were resurrected. The former chairman of Chinese insurer NCL, Guan misappropriated Rmb2.9 billion ($423 million) and was arrested two years ago. It also turns out he financed Li’s acquisition of a 65% stake in Shenzhen Airlines.

Li, who true to past form was arrested in the middle of the night, bought his controlling stake in China’s fifth biggest airline in 2005. The carrier – originally a state-owned air cargo joint venture with Lufthansa – was auctioned off by Shenzhen Development Bank to two of Li’s companies. To the chagrin of Air China, Li’s winning bid came in a mere Rmb10 million above its own.

And all the more galling: according to the Oriental Morning Post, Li still owed 20% of the proceeds at the time of his arrest. The newspaper speculates that Li’s particular ‘economic crime’ is connected to financing his stake with illegal funds from Guan.

Speculation now surrounds Air China – which owns 25% of Shenzhen Airlines – and its next move. Most think the flag carrier would like to take control, to establish a stronger foothold in the south of the country. With Shenzhen Airlines in tow, Air China would have a 43% market share on flights from the city of Shenzhen, and almost 20% out of Guangzhou, reports the China Securities Journal. That would help it square up to China Southern – another of China’s big three state-owned airlines – which has a market share of 28% in Shenzhen and 50% in Guangzhou.

Under Li’s direction Shenzhen Airlines had expanded rapidly as the country’s largest private sector carrier, building up a debt to equity ratio of 96.3% by the middle of this year. But he also piloted the airline – which had been profitable for 14 consecutive years – into a loss of Rmb4.45 billion in 2008 and made only a minor profit of Rmb49.94 million in the first half.

If Air China does swallow up another acquisition, it will constitute another example of a private sector airline being bought by a state–owned competitor (see article about East Star in WiC12).

It would also seem to accelerate trends in which the aviation industry is consolidating into a “big three” of Air China, China Eastern and China Southern.

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