The Perils Of Red Capitalism

Larry Yung was the shrewd operator, amassing a multibillion-dollar portfolio in Hong Kong blue chips and hobnobbing with the money elites of Asia and Europe. Huang Yantian lived more on the edge, a former party official turned wheeler-dealer who cruised the streets of Guangzhou in a silver Lexus and knew how to get around Beijing's dictates. As the guiding lights behind two of China's most entrepreneurial financial institutions, Yung and Huang presented different faces of red capitalism. But both were golden in the eyes of Western banks and investment houses that threw money at their firms--CITIC Pacific Ltd. and Guangdong International Trust & Investment Corp. (GITIC), respectively--during China's go-go years.

No longer. As details emerge of the financial missteps at Yung's CITIC Pacific and Huang's GITIC, it's becoming clearer both fell victim to the same delusion: that global capital markets would continue to supply cheap money without asking hard questions. With the Asia crisis gouging earnings at CITIC Pacific, investors are jumping ship, sending the stock down by 70% from its 1997 peak. That's bad news for the firm's powerful parent, Beijing's China International Trust & Investment Corp. (CITIC), which derives nearly all its profits from the Hong Kong subsidiary. A controversial bailout from Beijing earlier this year saved Yung from financial ruin. Now, CITIC is getting $4.5 billion in help from China's Finance Ministry.