By staff reporters Gong Jing and Wang Heyan

From Caijing Online

January 10 was a celebration day in Changzhou, not only because Premier Wen Jiabao paid a special visit, but also because his official stop in the winter chill may have signaled a long-sought end to a sad drama over a shuttered steel mill.

Business and economic development leaders in this city in southeastern Jiangsu Province were especially hopeful that the premier’s visit was a vindication of sorts, four years after a central government crackdown led to the detention of top executives at now-defunct Tieben Steel.

And on a broader scale, the Changzhou stop for photos and handshakes underscored the central government’s eagerness to support the private sector amid the current economic downturn.

The State Council – China’s cabinet – had expressly ordered Tieben’s shutdown in April 2004 as part of a massive, nationwide campaign to rein in what was then an overheated economy. One of the government’s slowdown measures called for halting certain, rapidly expanding private companies blamed for overzealous development.

In the process, Tieben founder Dai Guofang was detained by authorities, falling overnight from his proud position as a successful entrepreneur in Changzhou.

At that time, Premier Wen personally brought the Tieben case before the State Council and ordered local governments to punish anyone responsible for what was considered the company’s problematic expansion. In April 2004, the council halted the project and officials from nine ministries launched a probe.

A task force assigned to investigate Tieben soon determined that Dai and other executives, in their push for progress, had violated several rules, including those governing land-use rights and financing. Dai was taken into custody, and several local officials were sacked. Two years later, Dai was accused of tax fraud at a four-day trial.

But a verdict in the Dai trial has yet to be announced. And last October, after nearly four years of detention, Dai was quietly released on bail. He’s now under house arrest.

Dai and his company apparently were in the wrong place at the wrong time. But times have changed.

In the four years since Tieben’s shutdown, the economy has switched direction. No longer overheating, the economy now faces a rapid slowdown, prompting the central government to loosen what had been tight, macroeconomic controls. Ultimately, business in Changzhou may benefit.

Dai’s Cloudy Future

Dai’s lawyers had fought for bail ever since the detention began, and his surprise release – under police escort -- was considered a victory that preceded the premier’s visit by three months.

Dai’s low profile since his release is being enforced by local police. They closely watch his three-story house and reject all interview requests. Dai cannot leave his home nor welcome a visitor without a local court’s approval.

During a recent trip to Changzhou by a Caijing reporter, Dai’s mobile phone was switched off and his family members were warned not to speak with the press.

A source close to Dai said he’s determined to fully cooperate with the government and hopes to put the case behind him as soon as possible. Dai is optimistic and, if he’s freed, wants to open another steel mill, the source said.

The source also said Dai’s case has had a serious impact on his family, especially his three children. His teen-aged son, for example, dropped out of a junior high school and now spends all his time at home.

Under Chinese law, Dai’s bail period can last as long as a year. Afterward, he must be returned to custody or prosecutors must withdraw their complaint.

Tieben Crackdown

The entire steel industry including Tieben was targeted by the government in 2004 for driving the economy toward overheating. Between 2002 and ’03, steel industry fixed asset investment rose 96 percent. It then jumped 107 percent in the first quarter 2004. Small and mid-sized steel mills were popping up across China.

But regulators considered many of the smaller mills, including Tieben, superfluous.  Tieben was built with tens of billions of yuan on 1,196 acres of former farmland. Its production plan called for an annual output of 8 million tons of steel.

The government’s sudden, tough crackdown on the Changzhou business had a chilling effect on private enterprises across China. Entrepreneurs got the message, and the economy started slowing down.

The official Xinhua news agency published a long list of Tieben wrongdoings released by government investigators. But many were actually problems tied to local government officials who had gone around central government land and lending rules – thereby benefiting the steel mill -- by subdividing land and issuing project loans based on small, individual plots.

Tieben and Dai were tied to two major allegations cited by Xinhua: cooking the books to obtain bank loans, and tax fraud.

Dai’s court case led to a complicated and opaque trial that opened in March 2006. By then, prosecutors had reduced the charges to forging receipts to evade taxes, punishable by up to 10 years in jail.

One local official close to the case told Caijing that the investigation was thorough and extensive, but that neither Dai nor Tieben were ever accused of bribery. Moreover, the official said, the land and lending rule violations were mainly blamed on the local government.

Such a dilemma is common among entrepreneurs facing what are considered “mismatched” crimes and convictions in China. These entrepreneurs are brought down on charges unrelated to the crimes for which they were convicted.

Defense lawyers think even the tax fraud allegations against Dai can’t stand up to close examination, since receipts used as evidence were actually forged by one of Tieben’s upstream suppliers.

New Environment

Since Tieben’s closure, China’s steel industry – especially state-owned mills – have roared forward. Production capacity rose to nearly 500 million tons in 2008 -- almost double the 2004 level.

Some private steel mills that weathered the 2004 storm have reaped windfalls. These included the companies Shagang and Jianlong, each of which posted substantial increases in revenues and profits in recent years.

But since June, in line with the global economic slowdown, steel production has cooled. Product prices fell by half over the next eight months, and the projected demand of 200 million tons in 2009 falls far short of the industry’s 500 million ton capacity.

Unlike 2004, when the central government picked fights with local governments and private enterprises, Beijing decision-makers are now looking to build partnerships with these groups. They are seeking teamwork to shore up the economy.

In Guangdong Province, for example, the provincial judiciary has relaxed law enforcement standards, declaring that entrepreneurs accused of minor economic crimes should be shown leniency.

It may be too late for Dai and the Tieben mill, where six giant furnaces are now rusting near the banks of the Yangtze River. But the rest of Changzhou – and private business in general -- is looking hopefully toward the future of entrepreneurship.

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