By staff reporters Zhang Na and Luo Jieqi
From Caijing Magazine  

Three years ago, railway magnate Zhang Haiying basked in fame as the so-called Strong Woman of Fuyang, an Anhui Province city that showered her with awards and honored her transportation company as an “example of innovation.”

Today, however, the Anhui Luo-Fu Railway Ltd. Co. that Zhang developed and directed has slipped from private hands and returned to government control. Meanwhile, Zhang is behind bars.

The Anhui Fuyang City Intermediate People’s Court in January found Zhang guilty of corruption, misappropriation of funds and bribery. The court handed her a two-year suspended death sentence, stripped her political rights for life and ordered her property confiscated.

Coinciding with the trial, the Ministry of Railways expropriated a 60 percent stake in the Luo-Fu railway, which spans 206 kilometers of track in Henan and Anhui provinces, ending 18 years of local government control and private ownership.

Most Chinese railways operate under a state-owned monopoly; few have been privatized. Zhang helped the Luo-Fu railway morph into a private entity before its eventual repossession by the state.

The process laid bare some of the obstacles inherent when any part of a state monopoly is privatized. In a non-competitive railway market, for example, privatization can lead to graft and financial fraud.

The entire railway project has seen trouble from day one, especially for local governments involved.

Henan and Anhui provinces raised the funds and oversaw basic construction when the first tracks were laid in 1973. Trains started running in segments, as each section was finished. The full line became operational in 1990. The Fuyang Railway Bureau in Zhang’s city managed the Anhui stretch.

“Before 1999 (the railway) was in extremely poor condition,” Ru Jianbu, Luo-Fu purchasing director, told Caijing. “A lot of money poured in, but there was nothing, or very little, to show for it. Trains would run very infrequently, and they were always empty.”

The railway was not without a future. It connected three, state-owned trunk lines -- the Liuzhou-Jiaozuo line to the west, the Beijing-Guangzhou line in its center, and the Beijing-Kowloon line on the east. And coal shippers found it extremely useful. Luo-Fu tracks led to several smaller lines with access to coal regions including Shanxi, Shaanxi, Inner Mongolia and Henan. To the east, the line led to coal-hungry areas along China’s east coast.

But government and financial constraints meant traffic on the Luo-Fu was light, and business difficult to get. One constraint was MoR’s control of all rail traffic scheduling. Because of this strict oversight, local railways found it difficult to share revenues.

Local railways could not expect to turn profits unless MoR “worked them into the traffic plan,” a member of the Fuyang Economic and Trade Commission told Caijing.

“If the MoR lets traffic flow on your railway in their plan, you can make money,” the commission member said. “If they don’t permit traffic on your line, or if they only run empty cars, there’s little you can do.”

Rolling stock was another problem for the Luo-Fu. Ru told Caijing that, due to a lack of funds, much of the equipment for the initial stages of the Luo-Fu railway was already outdated when it was bought from MoR.

“Before 2003, we were still using steam engines, and our rails were made from all kinds of metal of varying lengths,” said Ru. “Because of low-level technology, the trains couldn’t run fast. The maximum speed was 45 kilometers an hour.”

The ‘Strong Woman’

Conditions improved after Zhang started putting her personal connections to work for the Luo-Fu railway. That happened shortly after she accepted a post as director of the Fuyang Railway Bureau in 2001.

Zhang, an Anhui native, got the railway job after working her way through local government ranks, rising from family planning cadre to deputy director of the Fuyang Development Zone.

When Zhang arrived, the bureau was struggling. But within a year of her appointment, Luo-Fu’s losses vanished and the railway turned a profit, according to a railway official.

Zhang made several money-saving changes, following market models and adjusting train schedules until the railway got it right. Her “biggest contribution” was fixing the schedule, said a local railway official who prefers to remain anonymous. Freight traffic soared.

“Freight volume in 1997 was only 900,000 tons,” said another Luo-Fu worker. “After (Zhang) arrived, freight volume increased to around 3.66 million tons by 2003.”

Meanwhile, the Fuyang government started laying the groundwork for a gradual end to government funding. Enterprise reforms were clarified in 2003. That same year, Zhang offered a plan for restructuring the now-profitable railway. Local officials, pleased by the financial turnaround, agreed.

“The restructuring was proposed by Zhang and (other managers). Of course, it also had the full support of the city party committee and government,” the Fuyang trade commission official said.

But the railway’s success had a dark side. Zhang was a mistress of behind-the-scenes financial manipulation.

For example, her career path had been smoothed by personal ties to Wang Zhaoyao, a former vice secretary for Anhui. Zhang got that support through bribery, according to evidence presented at her trial. Indeed, the court found Zhang bribed Wang 14 times, handing over more than 150,000 yuan between 1997 and October 2004.

As part of a crafty deal struck in 2004, ownership of the Luo-Fu railway was transferred through a restructuring from the local government to the private Luo-Fu Railway Co. at zero cost. Zhang and 22 other Luo-Fu managers said they invested 10 million yuan in a share registration for the newly restructured railway company. Zhang claimed to have contributed 5.4 million yuan through a legal representative, giving her a 54 percent stake in the company, while the other 22 investors said to put up between 100,000 and 300,000 yuan each.

Free Transfer

The 10 million yuan put up by Zhang and the other investors was never delivered to the Fuyang branch of state assets management agency. Even today, the whereabouts of those funds remains a mystery. In this way, Zhang and her team became owners of a 70-kilometer stretch of an increasingly efficient railway for nothing.

The case was one of the few instances in which a share transfer chipped away part of China’s government railway monopoly. Privatization in the industry is rare, and retail investors tend to stay away due to long waiting periods for low returns on large investments. In addition, access to the railway business is restricted by the government.

An exception was the 2006 case of CNTIC Kong (Holdings) Ltd., a private company in Shenzhen that bought 100 percent equity rights to Luoding Railway Co. from Guangdong Luoding Yongsheng Assets Operation Co. Ltd., a state-owned company. The price for ownership rights was 41.86 million yuan.

But Zhang got a free ride. The Fuyang trade commission official told Caijing the transfer was approved because an audit determined the railway had negative net assets.

However, according to other sources who spoke with Caijing, the railway had been making money for two years before the transfer. Prosecutors said Zhang worked through numerous channels to conceal company income from auditors.

Court evidence showed that, before the restructuring, railway bureaus in Zhengzhou, Shanghai, Wuhan and Beijing acted on behalf of the Fuyang bureau by posting an extra 14.22 million yuan in combined freight income. The adjustment was a result of new accounting standards. Zhang told her staff to leave this income off the books until she approved its inclusion in September 2005.

In addition, during the restructuring, sources told Caijing, Zhang arranged for staff members to conceal 2 million yuan in assets held by a passenger and freight service company under the Fuyang Railway Bureau. This company was not included in the audit, but its assets were transferred to Luo-Fu’s account after restructuring was complete.

Zhang had significant wiggle room because the railway oversaw its own asset assessment, the Fuyang trade commission official acknowledged. “As long as there was a basis, they could think of a way to over-count debt and undercount assets,” he said. “They did whatever it took.”

After the restructuring, Zhang created two new companies in August 2005 and March 2006, using relatives as shareholders and corporate proxies. On several occasions, Zhang transferred Luo-Fu railway funds to these companies, according to the court. Between August 2005 and April 2007, the court said, Zhang used these companies to illegally siphon about 47.7 million from the railway.

Revolving Credit

Zhang’s downfall began after she was tied to a corruption case involving former Anhui’s former deputy secretary, Wang Zhaohui, in 2007. The case also marked the end of the line for the privatization of the Luo-Fu railway.

That year a court in Jinan, Shandong Province, convicted Wang on bribery and fraud charges, handing down a two-year suspended death sentence. Prosecutors said he accepted 7 million yuan in bribes and took illegal possession of 6.5 million yuan in property.

As Zhang came under scrutiny, the Fuyang city government in June 2008 bought Luo-Fu Railway Co. shares for 100,000 yuan apiece. The payment covered the original investments made by each minor shareholder. But because the source of her investment could not be identified, Zhang was not compensated according to her stated investment.

Questioned by Fuyang police, Zhang confessed that 5 million yuan of the 5.4 million invested came from a non-asset backed, one-month loan approved by a friend at the Fuyang City Credit Union. Officials said that friend was too friendly.

“For an individual to receive such a loan would be quite difficult, although credit unions have lax management,” one source said. “If you’ve got the connections, it’s certainly possible.”

Luo-Fu’s former deputy minister of finance, Zhang Henggui, told told Caijing?? that Zhang schemed up a revolving credit plan. Every month, the credit union would issue a new loan for 5 million yuan. At the same time, Luo-Fu’s account would be used to repay the former month’s loan. The practice ended in July 2005, when Galaxy Credit Union agreed to a one-year loan.

Zhang had to change strategy in August 2006, when Galaxy merged with Huishang Bank. She directed Zhang Henggui to obtain a new, one-year loan for 5 million yuan using Luo-Fu’s 5.3 million yuan time deposit as collateral. Later, the bank erased the loan principal and interest from Luo-Fu’s account.

Zhang Henggui’s testimony showed Zhang’s 400,000 yuan investment came from a pre-restructuring, Luo-Fu slush fund – an amount that’s yet to be recovered.

The court found that Zhang, without approval from the company’s board, misappropriated as much as 20 million yuan, including the 5 million yuan loan, between July 2004 and March 2006.

Ministry of Railways Takeover

As Zhang’s empire crumbled, the Ministry of Railways led a restructuring of the Luo-Fu railway in late 2008 by forming a new company headquartered in Zhoukou, Henan Province.

“MoR put up its entire investment in cash, acquiring a 60 percent stake in the company,” the Fuyang trade commission official told Caijing. “Henan Railway Group and the Fuyang state assets bureau put up the net assets they already owned.”

Plans for a new Luo-Fu company were unveiled in December alongside a proposal for upgrading the railway. The improvements would include an electrified line allowing speeds of 120 kilometers per hour, with future upgrades to accommodate 160 kilometers per hour. The project would cost 6 billion yuan, with 2.4 billion yuan spent in the city of Fuyang.

The improvements are expected to be completed in the second half 2010, when annual freight volume should reach 160 million tons. The railway is to form an east-west artery for coal transportation. Moreover, passenger train improvements are expected to slice travel time between Luohe and Fuyang in half, to just two hours.

“In terms of stimulating the economy, this is certainly a good thing,” said the Fuyang trade commission official. “Relying solely on local investment to transform a railroad would be exceedingly difficult.”

Local governments are pleased by the Luo-Fu railway’s higher efficiency as well as the stability brought by nationalization and Zhang’s removal.

The Fuyang trade commission official said that, in addition to providing funds and technology, MoR’s commitment to the railway would guarantee that the Luo-Fu will be “part of the national rail system, and never again have to worry about insufficient traffic.”

1 yuan = 14 U.S. cents

Full Article in Chinese：http://magazine.caijing.com.cn/2009-02-22/110072421.html