The curious case of Wong Kwong-yu (also known on the Chinese mainland as Huang
Guangyu) came to light a few days ago when the person usually thought of as
China's richest man suddenly disappeared altogether from the public eye. As
chairman of the national retailer GOME (Hong Kong stock exchange listing 0493),
specializing in electric appliances, Wong was a man to reckon with for
manufacturers of various consumer goods in China.
On the face of it, Wong's arrest and his replacement within the company by Chen
Xiao appeared part of a well-rehearsed script that has become all too familiar
for shareholders of leading Chinese companies. Previously, other highflying
tycoons such as
Yang Bin, Gu Chujun and Zhen Zhongyi have came to grief for alleged corruption
or corporate mismanagement.
I wrote last year about issues with corporate governance and valuations in
China (see What's
the Chinese for Ponzi, Asia Times Online, 2007 over a year ago. It
appears that no meaningful improvements have come about in China during this
period as the most recent cases testify not just to bad behavior but also to
knee-jerk reactions from the government.
Already, China's banks have developed a reputation for unveiling ugly surprises
both from their domestic lending operations and their offshore investments.
Even recently, the government was forced to take some US$130 billion in problem
assets and inject over US$20 billion in capital into the Agricultural Bank of
China as it prepares for a stock exchange listing over the next few months. Any
bank that can make that many problem loans into an economy growing at over 10%
a year consistently for the past decade or so certainly deserves a few
"medals”; more so even than all the silly bankers who bought "triple-A" rated
mortgages from US investment banks.
Recently, the high profile case of Hong Kong-listed CITIC Pacific having to
write off almost US$2 billion also came to light, putting the diversified
conglomerate that is controlled by Beijing-based CITIC in the same category of
mismanaged Chinese companies as some of the country's leading banks among
others.
What made the Wong case a bit more strange is that the move to arrest the GOME
chairman was taken apparently almost a year after the investigation into the
share manipulation of two Shanghai-listed companies controlled by his brother
had ended. Last year, GOME had announced that the enquiry had ended without any
charges being filed.
Still, the rather complicated situation of his subsequent arrest has created a
number of new questions to be raised, including the specific evidence that led
to his recent incarceration, information exchange with the company's other
major shareholders - which include one of the world's largest private equity
firms - as well as the (potential) involvement of other company officials in
the matter.
Following a press release on November 24, wherein GOME denied that its chairman
and controlling shareholder was being investigated by the police as was
reported in a Hong Kong financial newspaper, the company reversed course on
November 28, admitting that the Beijing Security Bureau had informed company
officials verbally that its chairman had been arrested in turn
necessitating a change of management.
Deja vu Russia
We cannot know much more until the transcripts of the case are released to the
public, or when Wong Kwong Yu is formally produced in a court to be sentenced.
Until then though, the pattern of arresting some of the country's richest
people on a sporadic basis suggests that China has yet to overcome the effects
of tainted wealth that were produced by rampant corruption during the Jiang
Zemin era.
A number of members of Jiang's Shanghai clique (he was mayor and Communist
Party chief of the city before rising to be the country's president and party
general secretary) have been purged since Jiang retired from senior positions
between 2002 and 2004. Yet notably Wong Kwong Yu, whose date of birth is
variously given as 1969 or 1970, was not even a member of the party. This made
his climb to dizzying wealth all the more notable, albeit for many of the wrong
reasons that the Shanghai clique has been accused of in the past, including
rampant corruption and overt nepotism.
In making these arrests, it appears that the Chinese government is trying to
reinstate justice, particularly when those who became rich by corrupting
government officials do not then reform themselves to avoid further problems
with the law. In the case of Wong Kwong Yu, we may not be too startled to
discover that some level of intervention by persons acting on his behalf into
the previously concluded investigation was the main cause of the current
prosecution.
Still, it is difficult to escape the feeling that China is in many ways also
emulating the Russian examples under former president and now Prime Minister
Vladimir Putin. Much as Putin cracked down on many oligarchs, or particularly
rich businessmen and industrialists, who had otherwise refused to toe his line,
it may seem that the Chinese government is also weeding out "undesirable"
behavior among the newly rich Chinese billionaires.
However, there is a big risk that the government will throw the baby out with
the bathwater, much like the Russian government has done to date. For example,
for much of this year and even before the commodity boom had started reversing,
Russian companies were valued at lower multiple of earnings than their
counterparts in other emerging markets including Brazil and South Africa.
This was because global investors feared the chances of a government crackdown
on any specific oligarch could be unforeseen, and therefore chose to create a
market discount for all Russian companies. In doing so, these investors may
have inadvertently pushed Russian companies to borrow a whole lot more from
their banks and bond investors than would have been needed if their equity
values had been higher.
In any event, this vicious cycle of low equity valuations leading to higher
debt soon erupted when commodity prices shrank dramatically from September, in
turn pushing down the value of all Russian companies while leaving their debt
unchanged. This is the primary reason for the net capital flight from Russia
accelerating as commodity prices fell, as debt investors had reasons to fear a
sharp rise in payment defaults.
Russian oligarchs have seen their net worth erode dramatically as a result of
these changes in the past few weeks, leaving many of them nursing losses that
now run into hundreds of billions of dollars. Those that are fighting to
survive can only do so under the auspices of Russia's state-controlled banks;
in turn this makes the companies even more dependent on the Kremlin than before
the crisis.
In effect, Putin may have reversed all the benefits of opening up the Russian
economy in the past two decades and presided instead over a renationalization
of various companies. That virtually guarantees that the time for Russians to
stand in bread and meat queues would be just around the corner as well.
China must be careful to avoid this fate, if only because the government has
now realized the importance of more balance between domestic consumption and
export orientation. In order to encourage greater consumption, avenues for
growing wealth domestically must also increase; for this to happen Chinese
investors must have greater confidence in their stock markets among other
avenues for improving wealth.
While no one has sympathy for people who garner wealth by illegal means, the
Chinese government must also be careful to avoid giving the impression that all
rich people are potential criminals who walk around freely only as long as they
can please Beijing bureaucrats. That would do incalculably more harm to the
Chinese economy than what the US recession would deliver in the next few
quarters.
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