Steve Quayle News Alerts

July 5, 2003
By Peter S. Goodman, THE WASHINGTON POST

CHENGDU, China, J — Eight years ago, He Ran was a manager at a state-owned shipping company with a good idea for a new telephone business. She lacked money to invest, but she had an asset that is just as valuable in modern-day China as a new crop of entrepreneurs rises from the chaos of economic transformation: access to the government’s money.

TODAY, He Ran is hailed as one of China’s most successful entrepreneurs, listed by Forbes magazine in 2001 as the country’s 82nd-richest person, worth about $70 million. In photos on the walls of the glass tower that houses her telecommunications empire, GoldTel Group, she wears red lipstick, brightly colored suits and conspicuous jewelry as she poses with powerful visitors: President Hu Jintao, former president Jiang Zemin. On a recent afternoon, her red Jaguar sat in the company parking lot between a Lincoln stretch limousine and a black BMW.

He Ran’s ascent encapsulates the sort of ingenuity China’s leaders are counting on as they transform a communist economy into one governed by market forces. From the unlikely confines of this city in central China, she recognized the appeal of a new technology — pay phones that accept prepaid cards — then administered its lucrative spread around the world’s most populous country.

SUCCEEDING IN CHINA

Hers is also the story of how many of China’s entrepreneurs acquired their wealth: using the state’s money and gaining control of once publicly owned companies to build private corporate empires. The phenomenon has played out in many countries that shifted from state-planned to market economies, as savvy entrepreneurs exploit vacuums of power, ambiguities in emerging rules and opportunities to amass once unthinkable wealth.

In China, it has occurred on an enormous scale. Yang Fan, an economist at China University of Political Science and Law in Beijing, estimates that from the beginning of reforms in the early 1990s through the end of the decade, nearly $4 trillion in public assets were transferred from state-owned companies to insiders. This is a case study of how one woman harnessed state capital and made herself rich.

According to documents seen by The Washington Post and interviews in Chengdu and Beijing, the profit center of He Ran’s telecommunications empire was launched with capital from state-owned companies, then sold to its senior managers and their relatives through a complex series of transactions, and finally moved overseas. Influential government and Communist Party officials helped her along the way.

AMBIGUOUS DISTINCTIONS

In China today, distinctions between public and private are often ambiguous, making judgments about legality complex. In this case, the agency responsible for determining what was proper ultimately gave its blessing to the series of transfers, according to sources in Chengdu and Beijing.

In a telephone interview from England, where she is studying computer science at Cambridge University, He Ran said she is a self-made success and does not consider herself rich. She said she did not belong on the Forbes list. She acknowledged China’s process of privatization has been characterized by shady dealing and that entrepreneurs often exploit state companies as sources of venture capital for enterprises that enrich only themselves. But she said hers is not such a case.

“I’m just an ordinary citizen, I have an ordinary person’s life,” she said. “When I started, I had no connections, I didn’t know anyone. It was only after we were successful that the government started to support us. It’s reasonable for them to support us, because we pay lots of taxes every year.”

He Ran said her creativity and willingness to launch a new company has created jobs and lifted one of the poorest regions in China. All the original state investment has been returned, plus a premium, she said.

He Ran’s climb began after she graduated from Nanjing Post and Telecommunications Institute and returned home to Chengdu, the capital of Sichuan province, a region best known for mountains, languorous teahouses and spicy food. She took a job at the local branch of a now-bankrupt, government-owned shipping company, China National Materials Storage and Transportation Corp.

STARTING WITH AN IDEA

He Ran and her then-husband had long discussed the potential of pay phones that take cards instead of money. They wanted to launch a company to make them. In China in the mid-1990s, a business idea in search of funding had essentially one place to go: the state sector. She persuaded her boss at the shipping firm, a state-controlled software company and a government research institute to invest. In 1995, Chengdu Guoteng Telecommunications was born with about $175,000 in registered capital, according to the documents. He Ran was placed in charge.

Two years later, He Ran and her colleagues had designed a prototype using imported parts, but they lacked capital to start making machines on a significant scale. Through a friend of a friend, she was introduced to Song Kehuang, whose Beijing-based company, China Commercial Real Estate Development Corp., was open to an investment in China’s hinterland. The country was in the midst of a dramatic expansion. Modern buildings were going up at a breathtaking pace and businesses seemed to be opening every day. Pay phones that accepted cards seemed at once an appealing symbol of the times and a convenience that consumers would embrace.

The photos on the wall at GoldTel's headquarters in Chengdu, China, memorialize the government favor that has aided its rise. In September 1997, Song’s company invested about $188,000. His involvement provided more than capital. As the son of Song Renqiong, a former assistant to Deng Xiaoping, he brought a network of relationships with officials — a valuable commodity in China, whose government still plays a dominant role in determining what gets bought and from whom.

He Ran forged her own ties with the minister of post and telecommunications in Beijing, Wu Jichuan, sources in Chengdu said. He was responsible for overseeing the industry throughout the country and was helpful in developing a market for Guoteng’s products, two sources said.

He Ran said she met Wu “several times,” but is “not very familiar with him.” She scoffed at the notion that personal connections played any role in her ascent. “People always regard that a woman’s success must be related to a man,” she said.

Only one official, she said, the provincial governor, Song Baorui, had a significant role in her company’s success. He helped persuade a local pharmaceutical company to guarantee the telephone company’s credit, allowing it to borrow $2.5 million from state banks, she said.

The telephone manufacturing company landed its first significant contract in October 1997, selling more than $500,000 worth of pay phones to Jilin province in northeastern China. The company was still state-owned, but that would soon change.

Early in 1998, He Ran and key associate, Mo Xiaoyu, met with Song in Chengdu, at the Lhasa Hotel, a faux-Tibetan-themed place where bellmen in red uniforms and caps preside over a grimy marble lobby. Among the topics they discussed was a proposal to launch a company to sell the telephone systems and develop new products.

Song claimed that He Ran said the new sales company could buy phones from the state-owned manufacturing firm at low prices and sell them to the final buyers at higher prices, ensuring big profits. Then, they would privatize the sales company, put the shares in their own hands and keep the profits. He Ran and Mo both denied making such a proposal and say Song proposed creating the new company.

In April 1998, a new sales and research company, Sichuan Huawei Information Industry Investment Co., came into being, endowed with $1.25 million in registered capital, according to the documents. The original telephone manufacturing company was its largest shareholder, with a 68 percent stake. Two other state companies invested the rest.

Song and He Ran are now embroiled in a battle involving Song’s claims that his company owns more of the telecommunications group than she recognizes. In an interview, Mo — now the chief executive of the telecommunications group — said He Ran established the new firm without securing Song’s approval and without convening a shareholder meeting or gaining shareholder signatures on a formal agreement. “This violates the corporate law in China,” he said.

But Mo, who said he was authorized to speak on He Ran’s behalf, added that she quickly remedied the error by selling the phone firm’s shares to the other two investors.

A year later, the sales company became a wholly private entity. According to the documents, on June 23, 1999, three privately owned companies and one individual purchased all of Huawei’s shares. One of the purchasers was Sichuan Daohen Computer Software Co., which belonged in part to He Ran’s husband, Zhao Pingyuan, from whom she is now divorced.

Mo said the buyers paid a total of $1.75 million — about 40 percent more than the state owned companies had invested a year earlier. The purchase price was justified by a company audit approved by the local government, Mo said. The following year, the company would book more than $3 million in profits, Mo said.

Three months later, in September, the three private companies sold all of their shares to 11 individuals, among them He Ran; her sister, He Qiong; her younger brother; He Li; and Mo. Documents filed to record that transaction shows they paid a total of $1.25 million — the same amount the company had been worth at its inception. Mo said the purchase price was insignificant: The same people who owned Huawei before still owned it, only now as individuals instead of through their private companies.

The sales company, Huawei, pays the manufacturing company to assemble its phones, Mo said in the interview. Though He Ran resigned from her position as the manufacturing company’s general manager in 1999 after the sales company was created, she retains seats on the boards of both companies. Both companies remain headquartered in the GoldTel tower in Chengdu.

Mo said he could understand how that arrangement — the same leadership retaining direct influence over the two companies — could be viewed as a conflict of interest: The lower the price the sales company pays for its phones, the greater the profit for its private owners while the smaller the revenues for the publicly owned manufacturing company. In recent years, while Huawei has been booking profits, Guoteng has been breaking even, Mo said.

Still, Mo said, the sales company tends to pay a premium for the manufacturing firm’s phones because “we want to take care of them.” Mo and He Ran both maintained that without the sales company’s success in developing new products, the old state-invested manufacturing firm would have gone bankrupt long ago. He Ran said the sales company has paid off more than $6 million of the manufacturing firm’s bank debts.

A POWERFUL ALLY

He Ran’s empire gained its most prominent ally in December 1999 with the appointment of a new Communist Party secretary for Sichuan province: Zhou Yongkang, who is now the minister of public security in Beijing. Eager to develop what has long been one of China’s poorest regions, he lavished special attention on telecommunications, including He Ran’s company, according to sources in Beijing and Chengdu.

Zhou brought a coterie of China’s most powerful officials to visit the factory. Up went the photos, lending the imprimatur of power. With Zhou endorsing the company to officials in other provinces and in Beijing, buying goods from He Ran’s telecom group appeared to be a party-endorsed imperative. Sales reached $120 million in 2000, Forbes said.

The successful company would soon become an overseas firm. In June 2000, the people who then owned the sales company transferred their shares to an entity registered in the British Virgin Islands, Shining Star Technology Ltd. According to the documents, He Ran was its first director and Mo had a seat on the board. He Ran’s siblings and her husband were also listed as executives.

According to Mo, the sales company decided to turn itself into a foreign enterprise on the advice of the Hong Kong office of Arthur Andersen Consulting, since renamed Accenture. The firm was preparing to sell stock to the public in Hong Kong. By becoming a foreign company, it did not need the approval of securities regulators in China, he said.

All of the stock transactions were filed at the Chengdu office of the Administration of Industry and Commerce, a government agency that is responsible for ensuring that the public’s interests are protected as state companies are restructured, transferred and sold. According to sources in Chengdu and Beijing with knowledge of the process, throughout the years of filings, He Ran’s government allies ordered bureaucrats to sign off on the paperwork without inquiry.

Song’s ownership claims eventually provoked inquiry at the Ministry of Finance in Beijing.

But when the ministry sent a team of investigators to Chengdu last fall, Zhou, the public security minister, told officials that the telecommunications group should be “valued for its contribution to society,” according to Beijing and Chengdu sources. The probe quietly died.

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