Economy, Talking Point

Flying too close to the sun?

Scandals at Suntech, Hanlong, Jointown and Jinye. Has a crackdown started?

Flying too close to the sun?

Suntech’s founder Zhengrong Shi has been told by the authorities he cannot leave China

Abraham Lincoln earned his nickname ‘Honest Abe’ for his integrity. But as his biographer Doris Kearns Goodwin points out, Lincoln’s wife Mary was not her husband’s equal in this regard. In fact, she was prone to creative accounting.

When she arrived in the White House in 1861, Mary was dismayed by how poorly the place was furnished. Keen to impress the Washington elite with her own sense of style, she went to New York to buy fine Parisian wallpaper, luxury rugs and elegant curtains. In fact, Mrs Lincoln got a bit carried away, far exceeding the government allowance for the First Family’s home. “Afraid to inform her husband, she inveigled John Watt, the White House groundskeeper, to inflate his expense accounts and funnel the extra money over to her,” writes Goodwin.

But it wasn’t enough. The bills kept coming and Mary found herself asking the Commissioner of Public Buildings, Benjamin French, to petition her husband for additional funds from Congress. The president was livid and refused, recognising that such lavish spending on home improvement didn’t chime well with the deprivations of the civil war period.

(For those curious about the outcome: French helped Mrs Lincoln out of her predicament by persuading a friendly congressman to bury $6,800 of furnishing bills in a complex list of military appropriations.)

Of course, Mary wasn’t the last person to spend beyond their means in seeking to realise their grand vision. Fast forward to modern day China, and a similar pitfall has beset Shi Zhengrong, once reckoned to be the country’s richest man. Shi’s solar firm Suntech Power is now bankrupt, making him a lead example of a number of business tycoons who have strayed into trouble in the past couple of weeks. And local media is wondering whether Shi’s difficulties are merely a coincidence, or another facet of President Xi Jinping’s anti-corruption drive.

First Shi: what’s happened to him?

Last week Shanghai Securities News – a newspaper run by the Xinhua News Agency – reported that Shi would not be allowed to depart the country “while authorities investigate the state of the company’s finances”.

Given that Shi is an Australian citizen, this is a measure of the seriousness of the situation.

Longer term readers of WiC will have some familiarity with the unfolding debacle. Last August we chronicled Shi’s decision to step down as CEO of the solar panel maker (see issue 161). Once a world leader in the solar industry, Shi’s firm had run up major losses due to sagging demand for its panels, coupled with falling prices. Aside from all the red ink, Suntech further spooked investors by booking a €560 million ($724 million) hit on a loan guarantee it gave to an investment vehicle named Global Solar Fund. Apart from the size of this hole, the bigger surprise was that Suntech – which controlled the fund – was accusing Global Solar of fraud. Fund managers were bemused by Suntech’s explanation: how could management not know what its own fund was doing?

As WiC warned in that issue, the next crunch for Shi would come this March, when more than $500 million in international bonds were due to be repaid. Without a stunning return to profitability, Suntech looked likely to default. That is what happened last month, leading to Shi’s departure as chairman too.

Suntech thereby achieved a dubious honour: it became the first company from the Chinese mainland to default on its foreign bonds since GITIC (an investment vehicle reporting to the Guangdong government) in 1998. Worse was to follow. Eight local banks including ICBC and Bank of China then sought to collect Rmb7.1 billion ($1.14 billion) of loans owed by the firm’s local operation, Wuxi Suntech. When the monies weren’t repaid, the banks petitioned a judge to declare the unit insolvent, which he did on March 21.

For Shi, the descent into bankruptcy was an Icarus-like fall. In 2006, his 30% stake in New York-listed Suntech had put his personal fortune at $1.7 billion, temporarily ranking him China’s top tycoon. With his personal drive and impressive engineering background, the tycoon rapidly expanded, riding a wave of enthusiasm for clean energy. At its peak in January 2008 Suntech’s stock traded at $90, and Shi’s firm looked on course for global domination.

But in order to become the world’s largest maker of photovoltaic panels, Suntech had borrowed heavily. By last month its net debt was 10 times its market capitalisation and as bankruptcy was declared, the stock had plunged from its once-great heights to just $0.39.

For those who bought into Shi’s vision at its height, it has been precipitous destruction of shareholder value. Bondholders now look likely to take a similarly drastic haircut. The Chinese banks are also facing billions of renminbi of bad loans.

Clouds on the horizon for Shi?

Shi was born in 1963 at a time when China was struggling with a series of famines and natural disasters. Times were so bad that his destitute parents gave him to another family to raise. From such inauspicious beginnings Shi entered university at 16. Thanks to his proficient English, he then won a scholarship to study in Australia. There, Shi charmed his way into the laboratory of Professor Martin Green, a Nobel Prize winner who has been described as ‘the father of solar energy’.

Shi returned to China in 2001 and persuaded the city government in Wuxi to back his solar panel enterprise, Suntech. With the Wuxi bureaucrats alert to the sector’s commercial potential – and keen to create a new energy cluster – Shi got the nod. For much of the next decade it looked like a win-win relationship for both parties. Meanwhile as Shi improved the efficiency of energy production from his solar cells and ratcheted up output, he was wont to get philosophical. At one point he told media that he was less interested in profits than “solving the problems of mankind”.

But what looked like such a brave new world in 2008 soon began to resemble a more mundane financial mess. Why so? Shi’s rivals were building panel factories at a rapid clip too, leading to vast overcapacity (Suntech’s annual output reached 2.4 gigawatts last year, with other Chinese firms producing 37.6 gigawatts). Anti-dumping tariffs imposed by the US and slowing demand in Europe then hurt export demand. Panel prices collapsed, pushing firms like Suntech into losses. At this point Shi’s decision to fund his breakneck expansion through debt and convertible bonds turned into a CFO’s worst nightmare.

Industry conditions, ill fortune and poor corporate finance skills all explain why Suntech faced a crisis last month. However, local media reckons there could be another reason why Shi has been told that he cannot leave the country: his control of a firm called Asia Silicon. Beijing’s investigation is thought to be looking at whether it was used to inappropriately funnel funds out of Suntech.

In an article last year CBN described as “suspicious” that Asia Silicon had signed a long term contract to supply $1.5 billion of polysilicon products to Suntech at “high prices”. It also looked odd that the supplier was given interest free loans by Suntech as well as a series of advance payments for its polysilicon. CBN reckoned that the Shi-owned private vehicle was getting favourable treatment from its ‘client’.

The ongoing investigation will ask Shi to clarify that these connected party transactions were fair and reasonable – in other words, that they did not disadvantage Suntech’s other shareholders or its creditors.

Other tycoons in trouble?

Another prominent businessman being investigated is Liu Han, boss of privately-owned Hanlong Group (see WiC85). Once again the Shanghai Securities News broke the news of his troubles. After much speculation about his whereabouts, it was reported that the Chengdu-based tycoon had been detained by police in Beijing.

The Public Security Ministry then released a terse statement saying that Liu was being investigated for harbouring a fugitive as well as other unspecified “serious offences”. In this case the fugitive that Liu is said to have harboured is his younger brother Liu Yong. According to Xinhua, the younger Liu is “a major suspect” in a triple murder.

Additionally Liu Han’s wife and ex-wife have been detained, another indicator that his problems are not of the mild variety.

Like Suntech’s Shi, Liu has also just missed a financial deadline. Hanlong owns 14% of Australia’s Sundance Resources and was in the middle of a A$1.5 billion offer to acquire the rest of the stock in a tender. But with Liu apparently in detention, the deal looks likely to lapse. Hanlong has been unable to demonstrate that it has the financing in place, or approvals from China’s economic planning agency, the NDRC (Sundance is developing an iron ore mine in central Africa).

Liu also has a major interest in General Moly, a miner of molybdenum – a vital commodity in the production of steel. Late last month General Moly had to announce it was suspending work on a $665 million loan for its Mount Hope mine in Nevada. This was to be arranged by China Development Bank, but would not go ahead, reported the Shanghai Daily, until the firm received “clarification from Hanlong”.

The outlook for the billionaire Liu and his natural resources conglomerate suddenly looks ominous. Other Chinese newspapers have been linking his detention to the Macau casinos. “It’s either about casinos, or debts, or underground money laundering,” an unnamed insider told 21CN Business Herald. “Considering frequent casino incidents related with the riches now in China, [Liu’s case] is definitely related to cross-border capital flows.”

Liu, of course, is no stranger to danger. He built his empire from scratch narrowly escaping an assassination attempt in 1997 when his former business partner Yuan Baojing tried to have him killed (Yuan was later sentenced to death).

Two more cases…

The Shi and Liu cases have grabbed most of the headlines, but as the Chengdu Evening News points out in an article entitled “The Rich Fall”, two other tycoons have also been embroiled in scandal.

One is Liu Baolin, chairman of pharmaceutical firm Jointown, and widely referred to as the richest man in Hubei province. Liu was not detained by the authorities, but was forced to call a press conference to clarify why he has two different identity cards (a complete shock to me, Liu claimed), as well as deny media reports that he’s been using company funds to make personal loans to others.

The other boss in the spotlight is Zhang Xinming, one of Shanxi province’s richest coal barons. He came to public attention when a whistleblower disclosed a letter about a complex deal Zhang had inked with China Resources Power, the state-owned giant, in which the Hong Kong listed entity was sold a package of coal assets for Rmb7.9 billion. According to China Business Journal the secretive arrangement is now being questioned over “serious problems” in the sale. The newspaper says that of the 10 assets offloaded by Zhang’s Shanxi Jinye Coking Group, two did not even belong to his company, one held expired exploration rights, and the largest mine needed its licence renewed. Other mines were suspected of being sold at inflated values. China Business Journal sent a reporter to Gujiao City in Shanxi and found that “most of the assets of the Jinye Group acquired by China Resources Power are in an ‘abandoned’ state.”

Zhang’s whereabouts remain unknown, according to the press. China Resources also refuses to comment on the transaction.

What to make of it all?

Is it a coincidence that the tycoons have had a turbulent time so soon after the National People’s Congress gave its (rubber) stamp of approval to the new administration?

One possibility is that the change of guard at the top is having repercussions further down the power hierarchy, disturbing many of the relationships between the business elite and their political patrons. This is something that WiC has alluded to before, especially in speculation that Xu Ming, a real estate billionaire, fell swiftly from grace after his patron Bo Xilai was detained last April. Xu has not been seen since.

Because of the increasing investment overseas by Chinese firms, the impact of similar cases is now more likely to be felt outside China too, not least by companies like Sundance Resources.

Ronald Wan, a professor at Renmin University, told Bloomberg that foreign firms “have to be clear about what kind of person they are dealing with, their background, and their political relationship with the current system”. Wan added: “There are different camps, different interest groups.”

Other analysts think the crackdown is designed as a warning shot, part of Xi Jinping’s stated campaign against corruption. After all, the line between private and public sector corruption is often a blurry one in China, with businessmen and bureaucrats in cahoots (particularly when it comes to receiving kickbacks for government approvals or access to cheap loans from state sources).

As one netizen commented on “Why do all these investigations target businessmen? Without the collusion of officials there won’t be business cronies.”

Ergo, in order to be seen to be fighting graft, the administration must not only demand reform from its own cadres, it must change the behaviour of many in the business elite too. Examples must be made.

On weibo there is also the sense that the anti-graft campaign is escalating. First there was the exposure of officials holding multiple properties (see WiC182, for our article on ‘Sister House’). Now tycoons are being targeted. “Who will be next?” one contributor asks.

More probes look likely in the days ahead. On Monday New Century Weekly reported that two more Sichuan business tycoons are now under police investigation too…

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