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Turning 18 Million Yuan Into 10 Billion

01-14 00:00 《财经》杂志 《财经》杂志

By staff reporters Li Tingzhen, Zhu Yue, and Li Yi

In a letter posted on his Sina microblog in July 2013, Wang Wenzhi, a reporter with the Economic Information Daily, a newspaper operated by state-run Xinhua News Agency, accused China Resources Chairman Song Lin of corruption and mismanagement. 

Wang contends that irregularities exist in state-owned China Resources' 10 billion yuan merger of Shanxi Gold Coking Group (Shanxi Gold Coking).

Zhang Xinming, chairman of the acquired company Shanxi Gold Coking, was dubbed "the richest man in Shanxi Province," "Shanxi's No. 1 Coal Boss," and "Gambling Tycoon of Shanxi." In Shanxi, it is not uncommon for new-rich coal bosses to gamble in Macau, intervene in local government affairs, and collude with local officials.

Rumors of illegalities including being connected to gangsters, swindling bank loans, bribery, tax evasion, setting up kangaroo courts, and manipulating the judicial system have accompanied Zhang for some time. He was punished by police for illegal detention and wanted for illegally crossing the border with forged documents, though he managed to escape unscathed each time.

It is difficult to know how much Zhang has profited from China Resources' controversial merger of Shanxi Gold Coking. But it is clear that Zhang will soon rake in over 10 billion yuan after winning a series of legal battles over the ownership of Daning Jinhai Coal Mine (Jinhai Coal Mine).

Back in March 2004, Zhang acquired a 60 percent stake in Yangcheng County, Jincheng City-based Jinhai Coal Mine for 18 million yuan. The cost of Jinhai's mining rights, at 224 million yuan, was to be paid in six annual instalments.

By 2005, Zhang and Beijing Xinye Investment Co. Ltd. (Beijing Xinye), which then owned 40 percent of Jinhai Coal Mine, ran out of money to make the payment.

Therefore, the Yangcheng branch of Shanxi Coal Transportation Co. (Yangcheng Coal Transportation), a state-owned enterprise (SOE), was brought in as a strategic investor Oct. 2005. Zhang sold a 13 percent stake in Jinhai Coal Mine to Yangcheng Coal Transportation, and Beijing Xinye sold a 15 percent stake.

In exchange, Yangcheng Coal Transportation paid a total of 8.4 million yuan for all these stocks, or 300,000 yuan for each share. In addition, Beijing Xinye and Yuefeng Coal Washery, a subsidiary of Shanxi Gold Coking, each got a 280-million-yuan six-year entrusted loan from Yangcheng Coal Transportation. After obtaining a 28 percent stake in Jinhai Coal Mine, Yangcheng Coal Transportation paid 61 million yuan to maintain Jinhai's mining rights.

By the spring of 2007, Jinhai's mining permit expired and it had to pay the remaining 112 million yuan to renew its permit. Unable to make the payment, Zhang and Beijing Xinye again introduced a second strategic investor - Qinhe Investment Co. Ltd. (Qinhe Investment), which purchased, at 300,000 yuan per share, a 46 percent stake in Jinhai from Zhang and a 15 percent stake from Beijing Xinye.

Zhang sold his last 1 percent stake in Jinhai to Qinhe Investment at the end of 2007. By then, Qinhe Investment owned 62 percent of Jinhai, Yangcheng Coal Transportation owned 28 percent, and Beijing Xinye 10 percent. In total, Qinhe Investment spent about 700 million yuan for these stocks, if the cost of mining rights the company paid and subsequent capital inputs are taken into account.

Yangcheng Coal Transportation and Qinhe Investment, believing their equity transfer contracts with Zhang and Beijing Xinye to be completed, started to make development plans for Jinhai. The market value of the coal mine, which was left intact during the province-wide integration of coal mines, skyrocketed to around 10 billion yuan.

In the first half of 2009, Zhang, who missed out on Jinhai's capital appreciation, attempted to persuade Qinhe Investment Chairman Lü Zhonglou to sell Qinhe's 62 percent stake in Jinhai for 900 million yuan. Declining Zhang's offer caused Lü a lot of trouble.

From March 2010 to June 2012, Zhang and his associates, together with Beijing Xinye, sued Yangcheng Coal Transportation and Qinhe Investment, asking the court to cancel the contracts signed years ago on transferring their equity in Jinhai Coal Mine to the defendants, on the grounds that the transaction prices were too low and did not reflect the plaintiffs' true intentions. The plaintiff argued there was malicious collusion between the parties with regard to contracts [to evade tax], which caused the government to suffer losses in tax revenue.

Zhang won almost all the cases (a verdict on the last case has not been reached yet) before the Shanxi Provincial High People's Court and the Taiyuan Local People's Court.

Liang Huixing, researcher at the Institute of Law, Chinese Academy of Social Sciences, contends that the verdicts have violated about a dozen legal principles and regulations. "These lawsuits would not even exist if coal prices had not risen. The cases were filed because coal prices increased," said Liang.

Tan Qiping, law professor at Southwest University of Political Science & Law, argues that the rulings on the cases on Jinhai Coal Mine's ownership dispute will seriously damage the development of China's market economy.

Full article in Chinese: http://magazine.caijing.com.cn/2014-01-12/113806301.html

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