October 04, 2005

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Doing business in Dandong

Tim Clissold's Mr China is an entertaining read about the perils of doing business in China. Today's Sydney Morning Herald follows a similar case, of Alex Liu and the Dandong International Hotel (sub req'd, full article below the jump). The story has everything: corruption, kleptocracy, ineffective courts, shifty dealings, useless and mythical guanxi and more besides. A rollicking good read:

Only a few months ago the $US7.8 million ($10.25 million) that Alex Liu and a group of ex-Hong Kong investors, including two Australians, had put into a high-rise hotel here looked like dead money, an expensive case study in what can go wrong with foreign investment in China.

Their local government partner had loaded the hotel with extraneous debts, seized the official seals and expelled the managers, put the enterprise into receivership, then handed it to cronies who milked it of cash.

This week the investment was back from the dead. The leading crony was under arrest, city officials were running scared and grovelling, and Alex Liu was back walking the lobby, directing staff in a physical and financial clean-up to salvage the business.

Still, it's a hair-raising story.

Liu, a 60-year-old building engineer with a well-regarded firm in Hong Kong and a family home in Toronto, Canada, and his partners are pillars of respectability.

But they had to act as street activists to gain attention in China and keep protesting to get judicial, party and state officials to override powerful and corrupt local vested interests.

Advertisement"Over the last three years we carried out demonstrations 13 times," says Liu, who unfurled protest banners outside Communist Party offices next to Beijing's Tiananmen Square and the Liaoning provincial equivalents in the north-eastern city Shenyang, under which Dandong falls.

Fellow investor Patrick Choi, an environmental engineer with the NSW State Government, and his brother Nelson would take leave and fly from Sydney to join Liu on the streets.

The demos would be timed for the most embarrassing moments, like the annual meeting of China's National People's Congress, when authorities normally clear the capital of known petitioners and other usual suspects.

Chinese police would quickly intervene, fold up their banners and hustle them off the streets. But each time the partners would get a new meeting with high-up officials to put their case.

The partners agree they were naive in 1991 when they first heard about a business opportunity in Dandong, the city that is the main Chinese transit point into North Korea which it faces across the narrow estuary of the Yalu River.

Dandong's city government had started building the city's first modern hotel but had run out of money with just the 23-story shell completed. Alex Liu had the expertise and, with his friends, the cash to complete the project.

It seemed a safe investment. Their joint venture partner was a branch of the Chinese government. They were Chinese, able to speak and read the language, and more likely to forge the unspoken understandings of "guangxi", or connections said to underpin business deals here, better than written agreements. Their foreign passports gave them tax and other privileges.

The hotel duly opened in mid-1994, ready to cash in on a prospective boom when North Korea's isolationist regime eventually succumbed to globalisation - something the world is still waiting for, though a trickle of barter trade across Dandong's steel girder bridge is steadily picking up.

But in the meantime, the investors found their local partners practising a version of capitalism they must have learnt from the 19th century robber barons.

The manager provided by the city-owned Dandong Tourist Corp got the hotel to take over several large debts incurred by the local government before it entered the joint venture.

By the time Liu and partners caught up with this, banks were foreclosing on interest-swollen debt. In April 2002 the Dandong People's Intermediate Court put the hotel into receivership, under a local company close to city officials called Fu Wah Management Co. Deprived of the official seals, Liu and partners were denied all access to the hotel and its accounts.

Little or no help came from the Australian, Canadian and US embassies. The investment had been made through Liu's Hong Kong firm, Fam Engineering, and was therefore no concern of theirs. For local officials, the investors were not quite foreign, and not Chinese either, and thus easy game.

So the long campaign of political embarrassment started and, finally in May this year came a breakthrough. The Liaoning provincial high court formed a special panel which ordered the lower court's receivership order revoked and the hotel handed back to its board of directors.

But court orders are one thing in China, enforcement another.

Alex Liu, who had been chairman on the board of directors in April 2002 and still was according to all legal forms, drove down immediately to Dandong along with an enforcement officer from the provincial court to receive the hotel.

"Instead we were met by three new faces, from a new company called Nine Continent Tourism Co, who claimed they were the board of directors appointed by the local partner," Liu recalls.

Once again, all the partners flew into China to mount further picketing attempts outside the offices of Liaoning's top communists. But there it seemed to rest, a not untypical case of local power cliques resisting directions from above.

But somehow - Liaoning officials this week refused to discuss the mechanics - the challenge was taken up. In recent weeks Liu Tinyao, a key figure in the Fu Wah Management Co, was taken in by the Liaoning anti-corruption agency for questioning.

As well as being asked about 5 million yuan ($811,000) missing from the hotel accounts, he is also said to be linked to some 10 million yuan embezzled from the Liaoning Securities Co, a provincial investment bank that recently had to be rescued with a 500 million yuan cash infusion from the central government.

Resistance in Dandong collapsed, with several high-ranking officials said to be nervous about their futures. Alex Liu walked back into the hotel on September 20. "There wasn't a single fen [penny] left in the till," he said - and an accrued debt of 72 million yuan.

Most of the podium and lower floors have been taken as collateral by banks and an asset management company, so the hotel has ownership of only the top 10 floors, including its revolving restaurant which allows diners to dine while gazing out over starving North Korea, and pays rent on the rest.

"It's very complicated," Liu says.

posted by Simon on 10.04.05 at 01:59 PM in the China economy category.


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