Trial and error

Before Liu Zhihua was sacked as vice mayor of Beijing in 2006 and given a suspended death sentence on corruption charges, he was responsible for a $40 billion spending spree to upgrade the capital for the 2008 Olympics.

Rather unsurprisingly, the once influential cadre found his fate tangled up with the rise and fall of a number of prominent entrepreneurs.

First was Guo Wengui, the fugitive who in recent times has waged an unprecedented publicity war with the Chinese government by making all kinds of allegations against senior leaders last year (see WiC363). According to Caixin Weekly, Liu was brought down when Guo got hold of a compromising sex tape (Guo is alleged to have exploited it to ensure he got control of a prime property project adjacent to the Olympic stadium).

This caught the attention of Liu’s superior, namely Wang Qishan, who was then the Beijing mayor. Shortly after Wang became China’s anti-corruption tsar in 2012, Guo went into exile in the US.

Then there was Liu Xiaoguang, known as the “Leading Big Brother” of Beijing’s developers and the chairman of Beijing Capital Land, one of the country’s largest real estate firm by assets in 2006. The property magnate was also investigated in relation to Liu Zhihua’s case. Although he was released without charge, the interrogation process placed him under severe stress and related medical issues saw him die last year aged just 62.

Last but not least is Zhang Wenzhong, the founder of Beijing-based supermarket operator Wumart, who was sentenced to 18 years in jail in 2008 after being convicted of bribery and fraud.

According to Caijing, a financial magazine, vice-mayor Liu assisted with Wumart’s early expansion in Beijing and Zhang was implicated in later investigations of Liu.

But unlike the other two tycoons, Zhang’s story has a happier ending. After spending 12 years behind bars, he made national headlines this month when the country’s Supreme Court ruled that he was innocent of the original allegations.

The landmark verdict is now being held up by state media as an example of China’s commitments to protecting the rights of private sector entrepreneurs.

Zhang was one of the most educated entrepreneurs of his generation. He majored in mathematics at Nankai University and obtained a doctorate at the Chinese Academy of Sciences in the 1980s. Then he earned another qualification from Stanford University.

Encouraged by Deng Xiaoping’s tour of southern China – which was designed to reboot stalling economic reforms – Zhang returned from California and set up a technology firm in 1992.

He opened his first Wumart store two years later, intending to showcase his new generation of information technology systems. But Zhang soon grasped the immense potential of China’s retail market. He switched focus and began to develop Wumart as a grocery chain.

Wumart grew quickly via acquisitions. However, most of the assets that Zhang purchased came from state-owned retailers.

Liu was a strong supporter and when the company went public in Hong Kong in 2003 the Beijing vice mayor even showed up at the listing ceremony.

In 2004 – the year that Pony Ma’s Tencent went public in Hong Kong and Jack Ma’s Alibaba launched Taobao – Wumart already controlledabout a third of Beijing’s supermarket and grocery sector.

With plans to expand beyond the capital and into real estate, Zhang was already wealthy. He and fellow retailer Huang Guangyu (Gome’s founder) were the Jack Ma and Pony Ma of their era (Huang was crowned China’s richest man in 2006, but he was later jailed – and still remains behind bars).

Wumart’s expansion ground to a halt in 2006 when Zhang was detained by anti-graft investigators following the sacking of Liu. He subsequently resigned as Wumart’s chairman and in 2008 was given an 18-year jail sentence.

According to Phoenix News, throughout Zhang’s trial, Wumart’s connection with Liu went unmentioned. Instead, Zhang’s main crime was said to be forging documents that swindled Rmb32 million ($5 million) worth of government subsidies.

He was also accused of paying bribes to someone who helped Wumart in an acquisition deal and of misappropriating Rmb40 million of company funds to trade shares for personal profit.

Many onlookers deemed the sentence too harsh, especially as Wumart wasn’t the only private sector firm that had taken advantage of grey areas in Beijing’s subsidy programme. His defenders pointed out that the rules did not explicitly make his firm ineligible to apply.

Zhang was released in 2013 after his sentence was reduced following an appeal. But in 2016, so as to clear his name, he petitioned the Supreme People’s Court and was surprisingly granted a retrial last year.

Readers may recall an earlier WiC article this year when we discussed why a Yabuli Forum member’s public tirade against red tape had stoked debate about the state of China’s business environment (see WiC393). In it we also predicted that the outcome Zhang’s retrial could become a landmark.

And the moment of truth came late last week, as the Supreme Court overturned the previous rulings on Zhang, which it described as “a misapplication of the law and should be corrected”.

While noting that private firms in earlier years had “sometimes breached regulations in some ways”, the court suggested that this did not necessarily constitute criminal behaviour.

State media looks determined to make a positive example of the case – exemplifying how the government is delivering “an entrepreneurial and innovation-friendly legal environment” for the private sector.

In another first the verdict was broadcast live on national TV and Zhang has been interviewed repeatedly by state newspapers and news programmes.

“When I heard the word ‘innocent’, I was trying hard to hold my tears,” he told CCTV. “After going through all these difficulties, I finally got such a result.”

“The case should be taken as a benchmark for Chinese courts to protect property rights and entrepreneurs’ rights,” Xinhua claimed.

Zhang now has the right to seek compensation from the government.

But for the time being he says he is more concerned with the wellbeing of his fellow tycoons. “The retrial is not only about my own story. The main character here is the Chinese entrepreneur and entrepreneurship,” he wrote in an open letter. “This is about the Party and our country’s attention to all entrepreneurs… and this is a new starting point to our rule of law to celebrate the 40th anniversary of market reforms.”

Zhang also suggests that his case might not be unusual and that the courts could soon be under pressure to rectify similar disputes.

Another case that could come up for retrial is that of Gu Chujun, the founder of Greencool, an acquisitive Guangdong-based electric appliances firm which – but for Gu’s downfall – could easily have grown in size to rival current industry leaders like Midea or Gree.

Gu founded Greencool in 1992 when he patented a freezing agent for fridges and air-conditioners. In 2001 Greencool took over Guangdong Kelon, then the leading refrigerator maker in the country but Gu was arrested in 2005 and later sentenced to 10 years in jail for economic crimes including falsifying his accounts.

Gu’s supporters have always questioned the case against him, claiming it was driven by official corruption and abuse of power. Since his release in 2012, Gu has been on a crusade to clear his name too.

And he has been a lot more aggressive in making his case than Zhang. As part of the process he has been demanding a retrial, plus Rmb48.9 billion in financial compensation from the China Securities Regulatory Commission.

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