Corporate Q&A

A long way to Guo?

Investigating Shanghai tycoon just the start, says China risk consultant

Albert Louie w

Louie: predicts the ‘Shanghai Gang’ is President Xi’s latest target

Beijing-born and US-educated, Albert Louie set up investigation specialist Kroll’s first representative office in Beijing in 1996 and was responsible for its China operations. He later established his own consultancy, A. Louie International, advising American firms and other multinationals on their operations in China.

Louie’s expertise and experience focuses on areas like political and business risk mitigation, crisis resolution and gathering information from his Chinese sources to help Western executives better understand local conditions, especially those likely to have a direct impact on their industries.

With news breaking last month that Guo Guangchang, the founder of Fosun, had briefly ‘disappeared’ as part of a government investigation, Louie discusses the broader ramifications of the case and why the ‘Shanghai Gang’ could be the next domino to fall in the anti-corruption campaign.

The news about Guo Guangchang last month caused shockwaves. What’s your interpretation?

Guo’s disappearance for a few days to aid an investigation sent out some powerful signals. Obviously it is not the first time a business tycoon has fallen foul of the government. The founders of Gome and Dalian Shide were both jailed, for instance. However, Guo is at an altogether different level and of much more distinguished pedigree. For a start he is a graduate of the elite Shanghai Fudan University, majoring in philosophy and subsequently earning his MBA. He is considered shrewd, talented and presentable compared with the more nouveau riche type of business tycoon. Guo has also been active buying companies overseas, and has had dealings with many foreign firms. He’s a successful homegrown entrepreneur with a global vision who has even been presented as China’s version of Warren Buffett.

On this basis alone, the news would have been big. But what made the Guo situation more significant was the broader context. He is the most powerful and prominent tycoon in Shanghai and his rise not only coincided with the era when Jiang Zemin ran the country but perhaps was also intricately aided by Jiang’s inner circle.

Jiang, of course, is from Shanghai and one aspect of his theory of the ‘Three Represents’ was about bringing private sector business people into the Party.

The fact that Guo was called in to aid an ‘investigation’ is understood by many in China to mean that President Xi Jinping has now focused his anti-graft campaign on Jiang’s home turf and the so-called Shanghai Gang. This is the powerful faction that gained economic and political influence during Jiang’s time in power, and then consolidated its grip (far beyond Shanghai) during the tenure of Jiang’s successor, Hu Jintao.

So 2016 will be the year to keep an eye on the Shanghai Gang?

The signs have been growing that this is the case. Last November, Ai Baojun, Shanghai’s vice mayor was detained. And in another revealing move Jiang Zemin’s son was forced to ‘retire’ from his position as president of the Shanghai branch of the Chinese Academy of Social Sciences. Other members of the Shanghai Gang have been arrested too, though less obviously as they were working in other cities, rather than Shanghai itself.

Throughout each of the waves of Xi’s anti-graft campaigns he has followed Mao Zedong’s strategy of ‘surround the city from the countryside’ i.e. arrest first the lesser players in a faction, then finally get the ‘tiger’. He did this with the so-called Shengli Gang, run by the former Politburo Standing Committee member Zhou Yongkang. After a series of arrests in the state-owned energy sector, and then of Zhou’s protégé Jiang Jiemin (former boss of oil giant CNPC), Zhou’s faction was broken and he was himself arrested. The same thing happened with Bo Xilai.

The other Mao maxim that Xi is following: ‘power comes from the barrel of a gun’. That means you need the backing of the military to take on powerful rival factions. Here Xi has been very active too, both in arresting senior officers close to Jiang and by undertaking wide-ranging reorganisations of the command structure. For example, he announced that 300,000 personnel would be cut from the PLA. There are various motives for doing this, but one is to remove hundreds of mid-level guys who are aligned with Jiang. It’s an open secret that many of them purchased their rank.

Then there is the news this week of the creation of three new military bodies. This is another means to consolidate Xi’s power over the armed forces. A new PLA Rocket Force will replace the Second Artillery Force in controlling China’s nuclear arsenal and conventional missiles. And a new ‘general command’ will be run by Li Zuocheng. He fought in the war with Vietnam and is known to be a professional soldier. Xi is thought to have picked him because he did not bribe and wasn’t promoted by Jiang during his 10-year presidency.

The other area of the military that is being reorganised is the PLA’s logistics, which was a big source of corruption. Gu Junshan, a former lieutenant general with responsibility for procurement, has already been jailed for bribery and misuse of funds. When investigators raided his mansion they found bars of gold and piles of money. Gu’s case was also linked to that of Xu Caihou, a former vice-chairman of the Central Military Commission, who admitted taking bribes in return for assisting with promotions.

Only with a solid control of the military can Xi feel comfortable about taking on the Shanghai Gang, the most powerful faction of all.

What does all this mean for foreign businesses in China?

There is another seven years under Xi and what we have been seeing is a changing of the guard. That doesn’t mean it should be bad for foreign firms. After all, Xi still needs the economy to grow. But my multinational clients are asking me to help them with in-depth due diligence on the people now making (or soon likely to be making) the decisions in their industries and their backgrounds. This is not just about one or two senior officials in Beijing – it involves teams of bureaucrats nationwide. Focusing on the right relationships and aligning with them is key to sustaining continuity and success. What I mean by this is ensuring that top executives from head offices call on and spend time with the key decision-makers and hence give them the appropriate amount of so-called ‘face’.

In an interview with the Financial Times Russian tycoon Oleg Tinkov said most Russian oligarchs are “temporary managers of their assets – they are not real owners”, citing the example of Vladimir Yevtushenko who was stripped of oil company Bashneft in 2014. Is the situation in China similar?

He’s right to some extent. There are a lot of similarities between Russia and China in this respect. The ownership of private sector companies, especially the successful ones, in China can be much more complicated than it looks from the surface. When you probe deeper you will find political figures exercising influence, either through representatives or their family members. Usually they will be in the shadows and their financial interests may be blended with that of the businessperson running the firm.

When the company lists abroad that is one of the ways for the officials to get their money out of China. It is extremely common and means that many private sector firms are far less ‘private’ than they look on paper. Another of the challenges multinationals face in China is figuring all of this stuff out, particularly when they partner with local private sector firms. They need to know who they are really partnering with, both in a business and a political sense.

For those with queries, email Louie on: alouie@a-louie.com


© ChinTell Ltd. All rights reserved.

Brought to you 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.