China: Strife At The Top May Spark A War On Corruption

Walking into the reception room at Shougang Corp.'s sprawling iron and steel plant, visitors are greeted by an enormous painting of Deng Xiaoping, the company's patron. China's paramount leader had been a comrade-in-arms with Shougang Chairman Zhou Guanwu in the 1940s. With Deng's blessing, Beijing-based Shougang grew from a smoke-spewing state steelmaker to an $11 billion multinational conglomerate that includes a bank, five companies listed on the Hong Kong stock exchange, and a massive iron-ore mine in Peru. None other than Deng's second son, Deng Zhifang, is the head of Shougang's Hong Kong-based real estate arm.

But with the patriarch now on his deathbed, being his old buddy may be a liability. The Chinese authorities announced on Feb. 17 that they had arrested Zhou's son, Zhou Beifang, 41. The natty, cigar-smoking chief of Shougang's Hong Kong holding companies is being investigated for "serious economic crimes." A day earlier, the elder Zhou, 77, was sacked as Shougang's chairman. News of the downfall of such well-connected men rocked the China business community. "With such powerful people involved, the decision had to go all the way to the Politburo," says a mainland economist.

Executives are worried that the moves against Shougang could signal the beginnings of a high-level anticorruption drive tied to the struggle for power in the post-Deng era. If China's leaders do go down this road, the results could be very destructive. That's because self-dealing and conflicts of interest have been widespread during the Deng era as many relatives and cronies of the Communist party elite used their connections to prosper in private business. Top officials must know that starting such a campaign could get out of control. But with an important National People's Congress set to convene in March in Beijing, such contenders for power as President Jiang Zemin and Premier Li Peng may still be tempted to attack such practices to demonstrate their leadership and damage rivals.

Business leaders in Hong Kong and China are taking note. They say they are hewing to the law and keeping their heads down. They don't want to be closely identified with any particular leader or faction. "The only way to protect yourself is to obey the law, not rely on guanxi," or connections, says a Shanghai businessman. He reports receiving phone calls from Hong Kong associates urging him to watch his back.

While the authorities have released few details of the charges against Shougang, the company's operations have long been regarded with skepticism by securities analysts and Chinese economists. Even though the conglomerate claimed it had earned some $700 million last year, brokers were wary of its financial reports. Analysts say that the authorities may suspect that the wheeling-dealing Shougang was a vehicle for profiteering by underpaying for mainland factories. It is also widely believed to have overpaid for its Peruvian mine in 1993 The company did not respond to requests for comment.

PRINCELINGS. Just before the moves on Shougang, the Legal Daily reported that up to $95 billion in state assets were looted in the past decade. State managers are believed to have profited by transferring units to overseas companies at below-market prices and by using privatization to buy up their operations on the cheap.

Worries about other companies coming under scrutiny rocked the Hong Kong stock exchange as investors dumped so-called red-chip companies that employ the children of senior mainland leaders. Also hit were the shares of Hong Kong multibillionaire Li Ka-shing's Cheung Kong Holdings Ltd., which has extensive dealings with Shougang and Deng Zhifang. Prices later recovered.

If the top leaders do embark on an anticorruption drive, doing business in China could become much more difficult. Western companies that have signed up the children of senior leaders could find these people to be problems, not assets. The so-called princelings, children of Deng and other top officials, could be especially vulnerable. "They are powerful only because their parents are still powerful," says an executive at a mainland hotel company in Guangdong province. "Once they pass away, they will lose everything."

So far, the top leaders are trying to squelch speculation that political infighting may escalate into a broad campaign against business. Beijing quickly sought to assure investors there will be no major changes in Shougang's operations. The major rivals for power have also been making big shows of unity to try to calm everyone down. For instance, Jiang, Li, and fellow Politburo members recently gathered at the Great Hall of the People for a holiday celebration. Jiang led them all in a rendition of Sing to the Motherland, the old revolutionary standard. One wonders how long they will be singing the same tune once the great choirmaster is gone.

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