Everyone understands what it means when someone complains that they cannot see the wood for the trees. It is a saying rooted in the mists of time, traversing languages and cultures.
And nowhere is it more applicable right now than in China where numerous entrepreneurs have tried to obscure their financial dealings behind a tangled thicket of shell companies, offshore accounts and the domestic shadow banking system. The central government considers them a systemic risk to the financial system and has begun chopping them down to size; a process aided by Xi Jinping’s recent consolidation of power.
The government has shown little interest in bailing out debt-laden private sector firms. Instead, one tycoon after another has been asked to undertake the rather ironically titled path of “self-rescue” by selling assets to reduce leverage. High profile cases include Wanda’s Wang Jianlin, HNA’s Chen Feng and Tomorrow Group’s Xiao Jianhua (see WiC354).
In February, the government went a step further, seizing control of Anbang Insurance and prosecuting its key shareholder Wu Xiaohui for “economic crimes” (see WiC399). Anbang’s dealings with retail investors are thought to be the main reason for the harder line.
And the government has just felled two new tycoons: Xie Zhikun and Ye Jianming. Both men are far less well known than other tycoons caught in Beijing’s crosshairs, but only because they have deliberately kept low profiles (featuring in the photo above is Xie’s wife, Mao Amin, a famous pop singer – Xie’s own face is notably absent from photo libraries; Ye’s photo is hard to get too).
Last week, it was revealed that Xie’s Zhongzhi Enterprise Group (ZEG) will sell a 33% stake in China’s third largest investment trust, Zhongrong International, a key cog of Xie’s investment conglomerate, to Jingwei Textile, a listed unit of state-owned China Hi-Tech Group.
And Ye Jianming might find his acquisitive energy firm CEFC China is put even more fully under state control soon.
Caixin Weekly reported last month that Ye had been detained for investigation. CEFC swiftly denied the report but the same news was later confirmed by a surprising source: the Czech government.
Ye became President Milos Zeman’s Chinese advisor in 2015 after CEFC purchased vast swathes of the Czech economy and made it a key Belt and Road lynchpin. His downfall marks something of an embarrassment for the president who dispatched aides to China to find out what was happening after Ye failed to turn up for his second term inauguration ceremony on March 8.
Xie’s and Ye’s rags-to-riches tales share many common roots. Both even started out in the forestry industry (Xie’s company name – Zhongzhi – loosely translates as ‘China Plantation’).
Xie grew up in Heilongjiang, China’s most wooded province, and started work in a state-owned printing factory before moving into timber and later financial services. But at some point, he clearly decided he was suffering from excessive exposure to wood, according to the Chinese belief in feng shui: a master told him his five elements (metal, wood, water, fire and earth) were not balanced. So he changed one of the characters in his name from 植 (wood) to 直 (upright).
Ye began his career further south in the coastal province of Fujian as part of the forestry police after growing up in a fishing family. How he made his money has never been clear, despite many investigations by the local media. But just over a decade ago he purchased oil-trading assets confiscated from Fujian’s notorious smuggler, Lai Changxing, who fled to Canada in the late 1990s.
Over the past 10 years both Xie and Ye have followed a very similar trajectory. After amassing vast fortunes, both branched out overseas on spending sprees that raised concerns at home and abroad. Their buying peaked just as the Chinese government started clamping down on foreign acquisitions that appeared to be evading capital controls, were non-strategic and were rubbing foreign governments up the wrong way.
Xie, for example, set up ZZ Capital International in Hong Kong, moving into the Cheung Kong Centre. He hired a string of expensive dealmakers led by Michael Cho from Qatar’s sovereign wealth fund.
According to Chinese media, he promised to give them $5 billion to spend over three years. Their first big acquisition, Dallas-based energy analytics provider Alerian, immediately sparked controversy. Critics alleged it would give China too much data on US energy security. The $812 million deal has yet to close.
Last year, the Wall Street Journal also reported that Xie was suing private equity firm XIO Group for allegedly failing to repay $1 billion in seed money, which had been structured through a share entrustment agreement (used by wealthy individuals who want to remain unidentified in corporate records). XIO denied receiving such funds.
Ye’s overseas activities turned CEFC into China’s largest private sector oil and gas company. In fact, that was Ye’s pitch: CEFC’s niche would be buying businesses the state-owned oil giants would find difficult.
But his rise to the top of the corporate tree has long puzzled domestic commentators. While publicly a private sector company, Ye wrapped himself in the trappings of a state-owned one.
He had a red “Party style” telephone in his office and highlighted former employment with the PLA’s China Association for International Friendly Contact in company documents. Some wondered if he was close to Xi Jinping given their links to Fujian province (which Xi ran in the 1990s) and Ye appeared to be the main broker for Xi’s historic 2016 state visit to the Czech Republic.
Ye’s fall from grace has garnered acres of newsprint over the past few weeks, though none are sure what caused his downfall. Some newspapers point to the arrest of Hong Kong’s former home secretary Patrick Ho, who had been working for a CEFC think tank and is accused of trying to bribe African governments to secure energy assets.
Then there is CEFC’s attempted $9 billion purchase of a 14.16% stake in Russian oil giant Rosneft from Glencore and the Qatar Investment Authority. And if ever a man hit his moment of hubris, it was when Ye marked that deal’s announcement last September with a 12,000-character essay boasting of how proud he was to be deepening Sino-Russian cooperation.
“Energy security has been one of the soft spots of China’s grand strategies. CEFC operates in the oil and gas business thus we ought to share the burden of our country, to serve our people, and try our best to make the Belt and Road Initiatives a success,” Yu wrote at the time.
Analysts suggested the deal might be a smart move if it was financed by the state on favourable terms. They were referring to the Chinese state, but in January it turned out that financial backing for the deal was coming from the Russian state via VTB Bank.
If it went ahead, it would put Ye in hoc to Russia should he fail to repay the loan; a potentially embarrassing situation for China, which views itself as the dominant partner in the Sino-Russian relationship. A number of newspapers, including the Financial Times, also wonder if Beijing is reticent about the Rosneft deal because of US sanctions against Igor Sechin, its CEO and close Putin ally.
Glencore has responded to Ye’s downfall by arguing that the deal should still go ahead, albeit to some degree of media scepticism. However, the Financial Times has pointed out this week that Citic may step in to ‘nationalise’ CEFC, doling out to the oil firm a similar fate to that imposed on the overly-acquisitive Anbang. One thing which looks to be ongoing: a reassertion of state control over “errant” companies in both China and Russia.
Xie’s fate looks the more benign of the pair, but the sale of his core asset – his powerful financial services arm – to a state entity looks to have reined in his shadowy empire. Among China’s business elite, the ringing question must be: who is next?
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