By staff reporters Yu Ning, Li Qing and Luo Changping

From Caijing Magazine

Mysteries surround the man ranked as China’s richest for two consecutive years. Despite his fortune and fame, little is known about his path to success and how he emerged wealthier than ever from a 2006 criminal investigation.

But details began to emerge after Beijing police arrested Huang Guangyu on November 26. The 39-year-old tycoon who controls several real estate companies and retailers, including China’s leading home appliance retailer Gome (HKSE: 493), was initially detained November 19 on stock manipulation charges, whipping up a sea of rumors about possible corruption.

Police confirmed the probe a week after detaining Huang, and Gome corroborated with a public statement November 28 naming Chen Xiao as acting chairman to replace Huang. The company said business would continue as usual.

The China Securities Regulatory Commission (CSRC) shed some light on Huang’s alleged crimes November 28, accusing the real estate arm of his empire, Pengrun Investment, with illegal activities involving large amounts of money in the restructurings of two public companies, Zhongguancun (SZSE: 00931) and Sanlian Commercial Group (SSE: 600898).

However, the Pengrun case may be just the tip of the iceberg, said Liu Hongtao, director of inspection at CSRC, which launched reviews of Huang and his companies in spring 2008 before turning the case over to police. Police are also investigating Huang’s brother Huang Junqin and business partner Xu Zhongmin.

Caijing learned the central government’s Ministry of Public Security assigned the probe to Beijing police, whose economic inspection office started focusing on Huang after the Beijing Olympics in August. Police restricted Huang’s international travel rights before ordering him detained.

“Although we can’t say the cases we are following are at the core of the investigation over Huang, they are certainly part of it,” said an official at the inspection bureau who asked to remain anonymous. “It’s like you caught a drunk driver, and he turned out to be a fugitive.”

Living on the Edge 

It’s not the first time Huang has stood at the edge of a legal cliff. He survived a serious brush with police in 2006 following a half-year investigation into tax dealings and possible loan fraud. But this time, authorities are dealing with more than a rich man with a business empire gone awry.

Since companies controlled by Huang employ more than 200,000 people and owe tens of billions yuan to banks, authorities have been forced to weigh social, economic and legal factors while determining Huang’s fate, said a source close to the investigation. The outcome may affect Huang’s nationwide chain of more than 1,000 Gome stores, which he built up from a single discount appliance shop in Beijing in 1986.

Thus, the source said, prosecutors are expected to take a flexible approach to building their case. And under Chinese law, the toughest sentence for market manipulation or insider trading is less than five years in prison.

Gome operates with a low profit margin. But many observers have guessed that Huang used Gome’s cash flow to gamble on the stock and real estate markets, since he frequently dabbled in investments on the secondary market.

“Huang used to boast about his ability to provide large amounts of short-term financing for periods of less than three months,” said a source close to Huang. “Three months is exactly the amount of time you can spend in delaying payments to suppliers.”

Rags to Riches

Huang was listed by Forbes magazine as China’s richest man in 2006 and ’07 before falling to third place in the 2008 ranking with reported personal assets of 18 billion yuan.   

Stories about Huang’s rise are well-known in China. Born into a poor family in Shantou, Guangdong Province, he left home at age 17 to try his luck in Beijing. He bought his first Gome shop with his brother, offering home appliances at low prices. He beat competitors by delaying supplier payments and cutting profit margins, earning the nickname “price butcher.” The business grew to six Beijing stores by 1993.

Those close to Huang call him shrewd and reckless, noting he worked more than 16 hours a day. One source said he was known for taking business gambles.

Huang also enjoyed socializing with other successful figures from Shantou including Huang Songyou, 51, a former vice president of the Supreme People’s Court of China who was arrested in October for alleged corruption.

The ex-justice was sacked after becoming the nation’s highest judicial official targeted by a Communist Party investigation. The Standing Committee of the National People’s Congress voted in October to remove him from the court post he’d held since 2002 on charges of bribery, corruption and a lack of moral integrity.

Shantou is also the home town of one of Huang’s financial mentors, Zhan Peizhong, who now lives in Hong Kong. After the two met in 2000, Huang followed Zhan’s advice and listed a part of his Pengrun real estate company on the Hong Kong stock market through a reverse listing. Huang used the same shell again and sold a majority stake, 65 percent, of Gome to Pengrun in April 2004, making the retailer a public company in Hong Kong and pocketing  8.3 billion yuan.

Unlike Gome, Huang’s real estate business grew slowly. He developed only one project, Pengrun Home in Beijing, between 1996 and 2003.

The 2006 Investigation

Huang’s fast track to fortune invited suspicion. In 2006, Ministry of Public Securities officers started investigating Hengji Group, a real estate company owned by Huang’s brother. Police froze Hengji’s assets and arrested a close aide, Yu Xingwang.

Meanwhile, the Chinese Banking Regulatory Commission started a separate probe of Hengji and Pengrun’s debt. Eventually, another 28 people and 39 companies under the umbrellas of Hengji and Pengrun came under scrutiny. A preliminary conclusion was that up to 1.3 billion yuan in loans were problematic, leading transfers of cash between Hengji and Pengrun that eventually wound up overseas.

Some of the 1.3 billion yuan came from seed money Huang and his brother used in Gome’s early years that, investigators said, they illegally obtained from the Bank of China’s Beijing branch. They had siphoned cash through fake rents, mortgage loans and car loans. Some of the money was repaid, but they still owed 400 million in interest and principal when the investigation began. In September 2006, branch president Niu Zhongguang was arrested.

Huang tried to get rid of the 400 million yuan liability by arranging for its purchase after the bank packaged it as a non-performing loan in 2004. The state-owned distressed assets manager Cinda bought the package at a 77 percent discount and, in 2004, tried to sell it at an auction where two of the four bidders were Huang’s relatives.

The relatives offered 160 million yuan -- close to the auction base – and might have won if not for banking regulators who stepped in and struck down the deal at the last minute.

Cinda then folded the 400 million yuan loan into a package of 1.5 billion yuan. Another auction was held in 2006, but Huang failed again.

“Had Huang successfully bought the package, he would have wiped out a dirty history of 400 million yuan by paying only a quarter of it,” said a manager at Bank of China’s credit department.

The unpaid loan and alleged tax malfeasance triggered the 2006 investigation. But, surprisingly, the investigation was called off. A Gome statement in January 2007 said the investigation had been formally withdrawn. Later, Huang told Caijing he had resolved what had been a normal business dispute.

How Huang settled with police, regulators and the bank remains a mystery. One explanation is that Huang borrowed heavily from Hong Kong investors to fill the hole and pay as much as 100 million yuan in tax evasion penalties.

Having cleared his name with police, Huang apparently turned to boosting his public image. He decided to change his public track record by first buying a Hong Kong-based monthly magazine called The Red Capitalist. But he missed a chance to intervene in the magazine’s editorial and business decisions before the magazine closed in 2007.

Managing his image was also a reason for Huang’s 2006 decision to acquire a major stake in Zhongguancun Group, a struggling science and technology company created with much fanfare by the Beijing government in 1999.

Huang played Zhongguancun’s savior when his Pengtai Investment bought 15 percent in April 2006 at 0.78 yuan per share. The stake soon rose to nearly 30 percent, making Pengtai the company’s largest shareholder.

At the time, Zhongguancun was saddled with debt from a failed mobile phone network project. The company had injected 4 billion yuan to set up a CDMA phone network in Guangdong Province and planned to receive 35 percent of what was expected to be billions of yuan in annual revenue.

But the plan bogged down after the State Council, China’s cabinet, in 2000 decided that all CDMA infrastructure would be handled by another company, China Netcom, as part of a nationwide telecom restructuring.

China Netcom showed no interest in paying for the CDMA network built by Zhongguancun’s subsidiary, Zhongguancun Net, in Guangdong. But to install the network, Zhongguancun Net had borrowed 3.12 billion yuan from various banks – using Zhongguancun as the guarantor. The loans were due in March 2006.

The Beijing government and Zhongguancun officials appreciated Huang’s rescue. But the tycoon investor apparently bit off more than he could chew; settling the tech company’s debt later cost him more than 1 billion yuan. His attempts to clear the books also exposed his apparent penchant for stock manipulation.

An investment banker close to Huang said the tycoon’s plan was to increase his stake in Zhongguancun, restructure the company, and create a shell to sell stock using a reverse listing through Pengrun.

Huang unveiled his scheme in 2007: Zhongguancun would issue 18 billion yuan in stock at 14.67 yuan per share to Pengtai and use the money to buy Pengrun. But his decision came just as the Chinese stock and real estate markets nosedived.

By last August, Zhongguancun’s stock was trading at 5 yuan per share, raising Pengtai’s costs at a time when many market watchers thought Pengrun’s assets were highly inflated. Zhongguancun’s board rejected the deal.

Market Manipulator?

Each arrow represents 'ownership of' in percent

Despite the unsuccessful restructuring, Zhongguancun’s share price rose to a peak 17.8 yuan in 2008 from 2.5 yuan in 2006. Why did the value jump 600 percent? Company fundamentals did not support such a steep increase.

“Zhongguancun’s share price was quite strange,” said one fund manager. “It looked like there was a market maker who had patience and was not eager to cash-out overnight.”

“Maybe the cost for the market maker was quite low,” the manager said. If Huang intended to push up Zhongguancun share prices that he bought at 0.78 per share, the manager said, the windfall would have paid for the restructuring.

Investigators say Huang’s other companies were tied to stock speculation as well.

Real Estate Flop

A former Pengrun official told Caijing that Huang was attracted to Zhongguancun by its real estate subsidiary, Zhongguancun Construction. He wanted to tap the company’s experience and connections in the housing market by, for example, naming Zhongguancun Construction’s general manager to the Pengtai board.

Huang hoped he could repeat his retail success in real estate. His dream never came true.

Indeed, Pengrun real estate developed only one project during its first six years. But in 2002, Huang’s brother-in-law Zhang Zhiming took control of the company and launched a massive apartment development, Gome Champion City, in east Beijing. He succeeded by following Gome’s low-cost model, pricing flats below competitors in the area.

After Huang and Zhang clashed, the tycoon took over Pengrun again in 2005. But Zhang stayed in the game by setting up another company, Mingtian Real Estate, which was 60 percent owned by Huang and 40 percent controlled by his wife -- Huang’s sister.  Mingtian successfully developed another phase of Gome Champion City.

Huang’s Pengrun, meanwhile, was aggressively hunting for land. Many doubted the company’s ability. Nevertheless, despite having just 15 million yuan in registered capital, Pengrun in 2005 offered 800 million yuan for a plot in suburban Beijing and got it.

Between 2007 and ’08, Pengrun actively stockpiled undeveloped land. It once bragged of owning about 100 square kilometers. But Caijing learned that that only 0.53 square kilometers were actually ready for development.

Huang’s grand plans coincided with a sharp decline for the real estate market. And while other developers started retrenching and building up capital, Huang headed in the opposite direction.

Huang continued buying land because he wanted to boost the net value of Pengrun, helping him reach the goal of a public listing through a Zhongguancun shell. The goal was to build a net assets value of as much as 18 billion yuan -- the amount needed to buy a majority stake in Zhongguancun.

Chinese government rules aimed at tightening real estate financing in 2007 soured Huang’s plan. Soon, it was clear that Pengrun would never reach the goal. A year later, police moved in.

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