The Poly Group is one of China’s more mysterious companies

Chen Hongsheng w

Heir to Deng Xiaoping’s legacy? Poly’s boss Chen Hongsheng

In April this year, Christie’s became the first foreign auction house to operate independently in mainland China.

In the same month it emerged that Francois-Henri Pinault, CEO of the company that owns Christie’s, had pledged to return two antique bronze heads to China (see WiC191).

A government agency described the act as “an expression of friendship to the Chinese people.”

The rat and the rabbit were part of a set of 12 heads, each representing a sign of the zodiac, taken when French and British troops looted Yuanmingyuan, the Old Summer Palace, during the Second Opium War of 1860. Five of the heads are still missing.

Pinault’s gesture was welcomed. But it is small fry in comparison to the contribution made by China Poly Group Corporation, a conglomerate with its own auction house, which has returned four of the heads to the homeland.

The state-owned firm spent Rmb30 million ($4.88 million) on the heads which included a cow and a monkey. However, it also managed to exploit the move to its advantage by holding an exhibition on the 150th anniversary of the Summer Palace’s destruction. The event, held at one of the company’s real estate projects, attracted thousands of people, reports Talent Magazine – helping it sell the apartments.

Serving the national interest and profiting from its culture are nothing new to the company, which is one of China’s largest but most mysterious conglomerates.

It traces its routes to Poly Technologies Corporation, which was founded by CITIC and the army, reports Talent. From the start, this was no ordinary venture, getting the blessing of Deng Xiaoping to trade in military equipment. From the outset there was also a deep family connection between Poly and Deng. That’s because one of the company’s founders, He Ping, was a general and the former paramount leader’s son-in-law, reports the South China Morning Post. This gave Poly an important place in the military-industrial complex. By selling weapons abroad, it was able to supplement the army’s budget. At the same time, it was able to bring foreign technology into China, which over the years has included Black Hawk helicopters from the United States as well as aircraft, missiles and submarines from Russia.

Today much of the weapons are going in the other direction, with China exporting them to other nations (Sri Lanka’s leaders, for example, credit Chinese weapons as a crucial factor that helped them defeat the Tamil Tigers after decades of warfare).

“China’s export of weapons is an important part of the nation’s foreign affairs and diplomacy,” Chen Hongsheng, a former soldier and the chairman of Poly Group, told Talent.

Chen – a co-founder of the group – remains proud of how the company’s military arm has served the country.

“Although at present the military trade business accounts for only a small part of Poly’s assets, revenues and profits, we will always regard serving the national defence as Poly’s glorious mission,” he said.

Poly Group has extended its reach into many other sectors. In the early 1990s it opened hundreds of companies in many different industries including real estate, apparel and advertising. It even put on elephant shows in southwest China.

In 1999, it became a more typical state-owned enterprise when supervisory control was moved away from the military, reports China Daily. At that point its haphazard diversification came to an end and the company shrunk its 18 business areas into just five subsidiaries. It also proved a tough time for the former soldiers who ran the business: profits amounted to just Rmb100 million and many managers were forced to resign when their divisions were closed down as untenable. Those who remained attended workshops on executive leadership. “We learned how to run a modern enterprise, and about the market economy and laws,” recalls Chen.

Some of the lessons must have sunk in. Poly continued to grow, albeit with greater focus, and now ranks 25th in terms of assets out of the 116 biggest state-owned companies, reports China Daily.

Real estate became a focal point. Han Qingtao, general manager of Poly Real Estate, said the firm was quick to see the market opportunity after the government withdrew many of its commitments to welfare housing. That opened the door for property developers to go on a building binge.

In addition, the company had a head-start on much of its competition, with lots of land and the ability to raise capital quickly from state banks. The conglomerate’s property arm is now China’s second-largest developer by market capitalisation, according to IFR.

With property already an established subsidiary, attention is now turning to another branch of the business – Poly Culture. A sprawling division covering theatrical performance, antique collections, artworks and auctions, as well as film and TV production and cinema management, Poly Culture is already one of China’s largest businesses in its sphere, with revenues topping Rmb1 billion, reports the China Daily.

This is a small amount relative to the group’s total revenues of Rmb100 billion. But Poly Culture’s general manager Jiang Yingchun told the China Daily he expected these business areas to contribute much more to China’s GDP in future, with Poly well positioned to benefit from this trend.

Other growth areas include natural resources. Talent says that Poly owns two oil blocks in Africa, as well as gold mines abroad and coal mines in Xinjiang. That fits with China’s ‘going out’ policy, although a resources division doesn’t seem to offer too many synergies with the world of the auction house and theatre.

No matter: the magazine adds that Chen’s main goal is to own a bank (he is not alone, see WiC192 for how state oil giant CNPC is pushing into financial services through Kunlun Bank). So far the authorities have thwarted Poly in this particular ambition but with Rmb140 billion in outstanding borrowings, Chen isn’t giving up easily. “If the Poly chariot is equipped with a financial engine, it must be able to run faster,” he comments.

Last year the firm made profits of Rmb18.77 billion, although its critics gripe that Poly’s status as a state-owned enterprise has given it extra advantages – a charge that its chairman is keen to refute.

“Outsiders always think Poly Group’s rapid growth has been the result of government support. The truth is that Poly Group’s development has coincided with the country’s reform and opening-up,” Chen insists.

It will be interesting to watch how Poly does in the new era of ‘Likonomics’. In spite of Chen’s denials, the firm was a big beneficiary of the lurch towards state capitalism that occurred in the last administration. Now it seems Premier Li Keqiang wants to rein-in the behemoths of the state sector and level the playing field to help the private sector thrive instead.

If so, Chen may be waiting quite a while for that bank…

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