The crooks who apparently managed to rip off the Bank of China's Kaiping branch for the best part of a decade weren't quite as skillful when it came to investing.
A trio of bank employees and their confederates allegedly stole a staggering $480 million from the branch, beginning in 1992 and continuing until they fled China last October. For Chinese authorities, it's a huge loss of money -- and face. How could so much money be ripped off? How could theft of this size go undetected for so long? (It was only when the suspects suddenly slipped out of the country that investigators realized the theft.)
And how could a stash that size be smuggled out of a country that prides itself on strict capital controls? The answers won't be known until a massive investigation spanning two continents and dozens of investigators is complete. (For more, see BW, 1/28/02, "China's Banks under a Cloud" and BW, 2/04/02, "The Bank of China's Black Hole".)
TURKEY FANCIER. It's possible, however, that many of the ill-gotten gains may never have made it any further than the Hong Kong stock exchange. Court documents freezing assets of an account in Hong Kong controlled by former Kaiping Branch Manager Xu Chaofan detail an extraordinary list of stocks that were allegedly bought using pilfered dough, extraordinary for what it says about Xu's investment -- or speculative -- strategy.
A list of the assets in the frozen portfolio shows that Xu had an uncanny ability to pick stocks that shredded shareholder value. Rather than plowing the allegedly stolen proceeds into solid blue-chip companies, he picked some of the raciest ones that the Hong Kong stock exchange had to offer. These were stocks that typically had a good story, but usually not much else.
The stories usually centered around so-called asset injections, a practice where state-owned parent companies in mainland China would sell assets to Hong Kong -listed subsidiaries at a discount to the market value. Shareholders figured they would get rich in the process. Belatedly, Beijing put a halt to this practice shortly after the Hong Kong handover.
DISAPPEARING ACT. How good were these stories? Good enough to make stocks do funny things, like jump 59% in two hours. That actually happened with Poly Investment Holdings, a company controlled by the Chinese military (and one of the stocks in Xu's portfolio) at the height of the "red-chip" boom in 1997.
According to a BusinessWeek analysis of the holdings, the stocks in the portfolio are now down 97% from their high, and two of the companies, including what would have been by far the most valuable holding at its peak, are bust. At their highs, these stocks were worth about $100 million. They're now worth $3.5 million. Xu would have done better investing in the Nasdaq.
It's impossible to know the entry prices, or to what extent the suspects may have cashed out on their gains. But this portfolio is a fascinating glimpse into the investment style of a man who appears to be one of China's most successful rip-off artists. He apparently gambled that, having made some quick money fleecing the bank, he could turn around and do just as well in the market. Wrong.
WELL-CONNECTED. Take Continental Mariner. It was one of China's hottest stocks, thanks to its links with the People's Liberation Army (PLA) and its supposedly impeccable political connections. During red-chip fever, investors loved the fact that Chairman Wang Jun was head of the PLA's trading arm, China Poly Group. Its vice-chairman at the time, Major General He Ping, was the son-in-law of paramount leader Deng Xiaoping.
In March, 1997, Hong Kong's red-chip boom was building to a peak as investors bid up shares in China plays ahead of the British handover of the colony to Beijing on July 1. By Mar. 10, Continental Mariner had gained a staggering 643% in the previous six months on rumors that its parent company would sell it cheap assets. Its price would double again by the time red-chip fever peaked in August.
Now, its shares have fallen to almost nothing. So have the shares of another company in the same stable of PLA-linked firms, Poly Investments Holdings. That 59% jump in two hours didn't provide much long-term solace to shareholders as the stock price slumped.
GONE UNDER. Shares in Guangdong Investment were pummeled after one of its controlling shareholders, Guangdong Enterprises (Holdings), went bust in 1998 as part of one of the most spectacular collapses in Chinese history -- one that took down a whole slew of government-linked companies in Guangdong province and left foreign bankers holding billions of dollars in debt.
The portfolio's biggest holding, at its peak, was Leading Spirit. Its price ran up in the 1997 bull market, but the former high-flyer's shares collapsed in 1998 when red-chip fever had subsided, and the chairman couldn't meet his margin calls. The company itself went under, owing more than $100 million in debt.
In March, 2000, just as the dot-com boom crested, Leading Spirit changed its affiliate's name from Leading Spirit Electric Co. to China DigiContent Co. and tried to turn itself into an Internet company. It didn't help the stock or the companies. Shares in both companies have been suspended from trading, and the companies are bust.
HOPELESS HOLDINGS. Even the more traditional Hong Kong-based stocks the group invested in are those favored by aggressive punters. Chief among them is Richard Li's Pacific Century CyberWorks, which took over the old Hong Kong Telecom in a daring leveraged deal during the dot-com frenzy two years ago. His stock has headed south ever since. Hopewell Holdings is run by one of Asia's most outspoken tycoons, Gordon Wu, but his aggressive expansion plans proved his undoing after the 1997-98 Asian financial crisis. And the list goes on.
Perhaps it's not remarkable that these are the stocks that the Kaiping gang bought. This is the world they moved in. But those who lived by breaking the rules have seen their nefarious gains shrivel in a way that smacks of poetic justice.
Peak Value of Xu's Holding* (date)
$69.9 million** (9/19/97)
9.8 million (8/29/97)
3.9 million (2/18/00)
Cosmos Machinery Enterrprises
Cosmos Machinery Enterprises
National Electronics Holdings Ltd
1.4 million (8/29/97)
Ming Pao Enterprises
6.5 million (7/18/97)
2.1 million (11/21/97)
*Assumes stocks were bought 1/1/97
**All prices are in U.S. dollars By Mark L. Clifford, with Miguella Lam, in Hong Kong