Gome affair shows risks of wealth

There are few business people in China with higher profile than Huang Guangyu, founder and chairman of the Gome electronics retail chain.

In October, Mr Huang was named as the richest person in China, with a net worth of $6.3bn according to the Hurun Report, which compiles lists of the country's wealthy. It was the third time that the 39-year-old had topped the ranking.

In an interview two weeks ago, Mr Huang appeared up-beat about the immediate future for Gome, despite investor concerns about a slowing economy and the company's tight finances.

 The Chinese government's fiscal stimulus package, which included talk of tax rebates for farmers, would provide a huge boost to Gome's sales in rural areas. “Basically I think it is very good news for us,” he said.

Yet the outlook for Gome, one of China's largest retailers and the largest seller of home appliances, now appears much less certain.

Shares in the company were suspended after local media reported Mr Huang, who is the controlling shareholder, had been arrested in connection to a probe into share price manipulation at another company.

Gome released a statement saying it had not received any legal confirmation of Mr Huang's arrest, although an official admitted to being unsure of his whereabouts.

Amid such uncertainty, some industry watchers said Mr Huang could quickly re-appear. Indeed, one Chinese newspaper said yesterday that he was already at home.

However, the episode is a reminder of the complicated political and legal terrain that successful entrepreneurs have to navigate in a country where the transition from centrally planned to market economy has not been completed.

“If it is true the person who is number one on the rich list has been arrested, then it will have a lot of repercussions for all other private entrepreneurs,” says Rupert Hoogewerf, who compiles the Hurun list.

Private wealth is not considered as suspicious as it was a decade ago, when rich entrepreneurs were assumed by many people in China to be hiding an “original sin” – usually an appropriation of state assets, funding through irregular means, or personal connections.

Private companies have expanded rapidly and under some estimates now account for more than half of gross domestic product. However, entrepreneurs still complain that they become an easy political target if their companies grow too big.

Many business people have chosen to join the Communist party and lobby for membership of prestigious party-linked groups in order to smooth expansion.

More than 15 per cent of the people on the Hurun list are members of either the National People's Congress, the legislature, or the China People's Political Consultative Conference, an advisory body.

The president of Gome's biggest rival, Zhang Jindong of the Suning chain, is vice-chairman of the All-China Federation of Industry and Commerce – a party-affiliated group of industrialists – and a member of the CPPCC.

When the first rich lists were published in China nearly a decade ago, several names prominent in the rankings soon found themselves under investigation.

One of the first of the new super-rich to be targeted was Liu Xiaoqing, a prominent actress in the 1980s who then moved into real estate.

She was known as the “billionaire actress” until she was arrested in 2002 in a high-profile investigation into alleged tax evasion.

Ms Liu was detained for 420 days and was ordered to pay nearly $3m in back taxes.

Two years ago, the Chinese authorities also launched a probe into an investment company controlled by Mr Huang.

At the time, local media reported that his brother Huang Junqin was also under investigation.

Gome's shares soared 12 per cent one day in January last year when it announced that the investigation had been terminated.

 http://www.ftchinese.com/story.php?lang=en&storyid=001023290