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    Greater China
     Oct 31, 2012


Page 1 of 2
Insider trading, Chinese style
By Peter Lee

Regarding the epic financial machinations allegedly practiced by the family of Chinese Premier Wen Jiabao, his supporters can draw consolation from the fact that the Wen family compares favorably to the Bo Xilai family in the matter of financial sophistication, investment success, and in not murdering its financial adviser.

They may also be heartened by the thought that China's tycoons are achieving parity with the West in best practices of legalized insider trading and self-dealing.

There is another group that definitely feels thrilled and empowered by the New York Times' blockbuster revelation concerning an alleged US$2.7 billion nest egg possessed by Premier Wen

 

Jiabao's family. [1] That group is not China's dissidents. It is Western print journalists, who feel under siege around the world, and especially in China. The Guardian's media critic, Michael Wolff, took it to the next level, calling the revelations the biggest thing since the Pentagon Papers:
The New York Times' unraveling of the holdings of the Chinese premier, Wen Jiabao, and his family may be its most direct challenge to a sitting government since its publication of the Pentagon Papers in 1971. Arguably, its forensic accounting will be even much more damaging and potentially transformational to the Chinese government than its seminal revelations about the roots of the war in Vietnam were to the Nixon government.

As with the Pentagon Papers, the Times now faces the concerted wrath of the government it has challenged. The Nixon administration took the Times to the US Supreme Court in a move that threatened to criminalize the company. The Chinese government has cordoned off the Times' digital reach into China and, effectively, declared it persona non grata in one of the world's most significant markets. In other words, it's a great day. [2]
Easy, tiger.

Actually, I think David Barboza's expose of wealth aggrandizement by the extended friends and family of Wen Jiabao might be the biggest thing in journalism since ... the Guardian's unconscionable butchering of the WikiLeaks release, but that's another story.

In the matter of the Pentagon Papers, the New York Times defied the advice of its lawyers and published the purloined documents at considerable legal risk without checking in with the US government. President Richard Nixon did not learn of the leak until he opened his morning paper.

The US government then tried to impose prior restraint - getting a court injunction to force the Times to stop publishing the ongoing expose - only to be rebuffed by the Supreme Court. The court, however, did not remove the New York Times from legal jeopardy, affirming for the most part that that the paper could be prosecuted after the fact for revealing state secrets under the Espionage Act (something that the Nixon administration considered but didn't pursue). Instead, infuriated by the leak, Nixon set up the "Plumbers" (leak-stoppers) covert operation that burgled the Watergate Apartments and eventually brought down his presidency. [3]

In the Wen Jiabao matter, Barboza collected the facts legally, and the Gray Lady gave the Chinese government a heads-up before publishing, as the New York Times' public editor reported:
On Friday, I interviewed the publisher Arthur Sulzberger Jr about the story, the censorship and what it means for The Times's global push.

"I'm very proud of this work," he said of the story. "Our business is to publish great journalism. Does this have a business impact? Of course."

Mr Sulzberger said the publication of the article was preceded by "conversations with the Chinese government to discuss it".

"They wanted to air their concerns - which I listened to, as I should," Mr Sulzberger said. "And eventually, we made a decision to publish."
The Times' foreign editor, Joseph Kahn, also confirmed discussions with Chinese officials, and put the scoop in the proper perspective vis a vis the Pentagon Papers:
Mr Kahn said that as recently as Wednesday, Mr Sulzberger and the executive editor, Jill Abramson, met with Chinese government representatives at The Times. But the focus of that conversation was not about the journalism - it was about political and cultural differences In short, Chinese officials were making the case that The Times not publish the article.

"I'm gratified - there's no other word to describe it," Mr Kahn said about The Times's decision to publish it. "People cite the Pentagon Papers, but that involved defying a legal order." [4]
The New York Times is suffering genuine and significant financial losses from the story - one can assume its costly Chinese-language launch has been blown out of the water for at least a few months - and it should be commended for running the piece, but the level of institutional risk and political significance does not appear to rise to a Pentagon Papers level.

Pre-warned by the Times, the Chinese government moved into containment mode. The Chinese Foreign Ministry issued a huffy response that the report was a smear, the New York Times US and Chinese-language websites were blocked, and the word was put out to "harmonize", ie scrub, web and blog references to the New York Times, $2.7 billion, so on and so forth. In addition, Western journos in China were subjected to an aggravating slowdown of Internet service.

Within the People's Republic of China, the report - which is inevitably filtering through the Great Firewall - has apparently not excited a new tsunami of disgust against the Chinese Communist Party regime. The response seems to have been muddled by the fact that the article took pains not to implicate Wen Jiabao personally, and by the fact that Wen is regarded as a leader - albeit of suspect efficacy - of the reformist bloc, and giving him a black eye is considered as providing aid and comfort to the enemies of reform.

The fact that Wen is retiring after the 18th party congress, to be started a few days from now, also takes some of the heat out of the allegations. There were even indignant accusations that the revelations had been fed to the Times by partisans of disgraced party official Bo Xilai seeking revenge on Wen for his role in Bo's downfall earlier this year.

This seems unlikely. Barboza is a well-regarded and tenacious reporter who spent almost a year sorting through Chinese corporate records to get the story. Perhaps Wen's adversaries were willing to egg him on, but, as in the case with the Bloomberg expose on Xi Jinping this past June (see here - for which Bloomberg staff were reportedly subjected to death threats by disgruntled Xi cronies - it can be assumed he dug out the story on his own.

The Barboza article is a fascinating expose of how the wealth-creation sausage gets made in the People's Republic of China, revealing how a family with political connections and access to information can leverage opportunities in everything from diamond-trading to construction of wastewater treatment plants with the help of a few billionaire friends in the PRC and overseas.

However - barring further revelations - it is not the devastating legal and factual brief against Wen Jiabao that the excited coverage might lead one to believe. The New York Times made the understandable, if rather questionable decision, to hang its hat on the eye-popping figure of $2.7 billion, inviting the inference that Wen's family exemplified official corruption on a truly heroic scale.
However, $2.2 billion of that figure is derived from ownership of shares of stock of Ping An Insurance imputed to members of the Wen family, shares that were purchased by partnerships in 2002, apparently for around $65 million, and which skyrocketed in value after Hong Kong (2004) and Shanghai (2007) IPOs.

As for those partnerships, the Times was unfortunately unable to come up with a clear determination as to whether they were simply front companies for Wen family skullduggery or, well, partnerships that provided privileged access for wealth creation for PRC and foreign elites, some of whom were members of the Wen family.

The Times carefully characterized the partnerships as:
Partnerships controlled by Mr Wen's relatives - along with their friends and colleagues - made a fortune by investing in the company before the public offering.
Wen family fingerprints are apparently all over these partnerships, but nailing down issues of legitimacy and control are, understandably, slippery issues. 

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