Corruption Case Is Seen Signaling China Struggle

The resignation of a senior state industrial chief and the arrest of his son--both of whom have close connections to senior Chinese leader Deng Xiaoping’s family--have prompted speculation here and in Hong Kong financial markets that the 90-year-old Deng’s power is waning and a succession struggle is under way.

The resignation of longtime Deng ally Zhou Guanwu, 77, chairman of the giant Shougang Group (Capital Iron and Steel Corp.) and the arrest on corruption charges last week of his son Zhou Beifang, 42, chairman of a Hong Kong-based Shougang subsidiary constitute the highest-profile case to surface since a government anti-corruption drive began in 1993.

But because of the Zhou family’s close connections to Deng family business interests--including a Hong Kong company tied to Deng’s youngest son--some contend it may also be the first shot in the succession battle that is expected to follow Deng’s death.

“The fact that Deng could no longer protect these people is a clear sign that his power is diminishing,” said a European diplomat here.

In the past, military connections have played the biggest role in determining who would rule China. Deng was helped into power in the late 1970s with support from senior leadership of the People’s Liberation Army.

The Shougang case illustrates that in today’s China economic interests and power bases may also be a factor in the succession struggle to come. Deng was the first Chinese leader in the Communist era to build an extensive financial, as well as political, base for his family.

These latest moves also support the theory that in the post-Deng period, the businesses of “princelings”--sons and daughters of Deng and other senior leaders--will become fair game.

Few companies have closer links to the Deng clan than Shougang, the huge steel and manufacturing company that employs 280,000 workers at its sprawling plant west of the Chinese capital and iron ore mines in Tangshan, Hebei province.

Zhou Guanwu’s relationship to Deng dates to the 1930s when he joined Deng’s Second Field Army in the anti-Japanese resistance and the subsequent civil war against the Nationalists. In 1979, the year after Deng took power, Zhou was named Communist Party secretary and director of the Shougang steel plant.

In May, 1992, Deng chose the Shougang plant for his first visit in his campaign to accelerate economic reforms. Under Deng, the Shougang Group was granted special privileges, including the right to open its own bank and deal in foreign currencies before other companies were allowed to do so.

The elder Zhou demonstrated his appreciation by building a large gallery and waterside pavilion on the grounds of the sprawling steel plant to display enlarged photographs of Deng.

Shougang also was one of the first mainland companies allowed to expand its holdings into Hong Kong and seek “back door” listing on the Hong Kong stock market.

By purchasing shares of already-listed Hong Kong companies, Shougang managed to gain controlling interests in five publicly traded companies. At the request of the Shougang parent company, the Hong Kong Stock Exchange on Monday suspended trading in all five companies.

One of those companies was Shougang Concord Grand, which announced ambitious plans to build a chain of shopping centers inside China. Its chairman was Zhou Beifang, the son of Zhou Guanwu; the company’s vice chairman and chief executive is Deng’s own son, Deng Zhifang.

Zhou Beifang was arrested at the family home in Beijing and charged with what a Shougang company spokesman said were “high economic crimes”--the term used here in corruption cases.

Deng Zhifang, the youngest of Deng’s five children, has not been linked to the charges. But the arrest of his close associate and partner in several Chinese real estate development proposals is the closest a Deng family member has come to a corruption case.

Details of Zhou Beifang’s alleged crimes have not been disclosed. Among many Hong Kong analysts, though, the Shougang Hong Kong companies have what one described as a “flaky image.” Although one of the main subsidiaries, Shougang International Enterprises, owned a sleek white yacht in Hong Kong’s Aberdeen harbor, the companies were not known for being as extravagant as many in the freewheeling business capital.

But company managers, including Zhou, had conducted questionable business transactions, including the 1992 purchase of an iron ore mine in Peru for $120 million, a price some analysts felt was too high. “The general impression,” said one analyst, “was that Shougang was a company growing too fast, not knowing what it wanted.”

So far, there has been no mention of the Shougang corruption case in the official mainland Chinese-language press. But it has sparked considerable interest in Taiwan and Hong Kong, where the reports prompted sharp drops in share prices for the stocks of Shougang and other mainland companies.

“It does cast a slight pall on the so-called ‘red chip’ companies,” said Paul Schulte, regional strategist for CS First Boston in Hong Kong.

In its extensive reporting on the resignation of the senior Zhou, ostensibly for reasons of age, and the arrest of his son, the Taiwan Times newspaper characterized it as consolidation of power for Communist Party General Secretary Jiang Zemin, who also serves as China’s president.

“It seems that the Third Generation leadership group,” the Taiwan Times story on Friday reported, “headed by Jiang Zemin, (Premier) Li Peng and (economic leader) Zhu Rongji has increased its dominance.”

The South China Morning Post newspaper in Hong Kong commented in an editorial Monday that the arrest of Zhou Beifang may be a signal that the Deng era is ending in Chinese political life and a warning about purges to come: “Mr. Zhou could be a tiger that has been trapped as part of a crackdown on corruption or a sacrificial lamb marking the waning influence of paramount leader Deng Xiaoping. The 90-year-old leader is close to Mr. Zhou and his father, Zhou Guanwu, who suddenly retired last week as head of Beijing Shougang Corp. The timing of Mr. Zhou’s arrest has aroused suspicions of post-Deng political purges.”

But here in the highly politicized Chinese capital, more complicated plots and power-struggle scenarios were being concocted involving hard-line Premier Li and billionaire Hong Kong tycoon Li Ka-shing, believed to have strong connections with the Deng family.

Li Ka-shing, through his company Chueng Kong Holdings, was one of the main investors behind the “back door” stock listings of the Shougang subsidiaries. But he was also the main developer of the $2-billion Oriental Plaza development on the fringe of Tian An Men Square in Beijing.

In December, Premier Li ordered a halt to construction of the massive project after he discovered it had never been officially authorized by the central government. In a rare outburst against the Beijing regime, Li Ka-shing, in a speech, attacked Chinese bureaucracy.

Li Ka-shing eventually was able to restart the Oriental Plaza project. But according to one scenario circulated here, Premier Li was behind the move against Shougang as an indirect attack against the Deng family and its powerful supporters, including Li Ka-shing.