For China's High-Flying Tycoons, A Precarious Balance | WYPR

For China's High-Flying Tycoons, A Precarious Balance

Nov 28, 2017

Sitting on a small stool in the lobby of Chinese electronics firm LeEco's Beijing headquarters, contractor Fu Hangxia remembers the company's glory days just a couple of years ago.

"They wanted to create a miracle," Fu says. "They did everything to the highest standards, and burned through a lot of money."

Fu's business boomed, as he produced the product launches and built stores for LeEco in China's southwest Sichuan and Chongqing regions.

Every time LeEco unveiled a new smartphone, with futuristic ads and theatrics and auditoriums packed with devoted followers, it reminded people of Apple.

LeEco founder Jia Yueting acknowledged that Apple was a great company, but warned in 2015 that if Apple failed to reinvent itself, "We will overthrow it."

Flush with credit, LeEco expanded aggressively overseas, investing, for example, in California electric car maker Faraday Future. But the company overextended itself, its credit began to dry up — and by May, it had to lay off most of its workers in the U.S.

That is why Fu Hangxia has been camped out on and off since last December in LeEco's headquarters lobby, trying to get what the company owes him. Fellow vendors lie sprawled in tents and on yoga mats, reading the latest dismal news about LeEco's decline.

"By now, we're numb to all the news," Fu says with a sigh. "Our aim is simple: we just want our money. And if we don't get it, we won't leave."

China's economic growth has minted a burgeoning crop of tycoons like LeEco's founder. Last year alone, it produced 101 new billionaires, three times the number in the U.S., according to a report by UBS Group AG and PricewaterhouseCoopers.

But in China, this news has been all but eclipsed by stories of high-flying tycoons falling from grace.

Other moguls who have run into trouble this year:

  • Xiao Jianhua, a reputed "white glove" or money launderer to China's leaders, disappeared from the Four Season Hotel in Hong Kong in January, and was apparently brought back to the mainland by Chinese agents.

  • Wu Xiaohui, head of Anbang insurance, married to the granddaughter of late Chinese leader Deng Xiaoping and owner of New York City's Waldorf Astoria hotel, was detained in June.

  • Real estate magnate Wang Jianlin, who once threatened to trounce Disney with his own theme parks, had to sell off most of his entertainment assets in July to pay off debt.

LeEco is one of a few big companies that have been criticized in China as fraudulent.

"It's essentially a Ponzi scheme," says Minxin Pei, an expert on Chinese politics at Claremont McKenna College. "It is a highly leveraged, hyped-up company with no real products. It's sustained by a chain of debt. So the moment its financing dries up, the company implodes."

Fu Hangxia disagrees with such criticism. He says he still admires founder Jia Yueting, even as he struggles to get paid.

"All China's tycoons burn through money like this to build up their business," Fu argues. "If their gamble pays off, then they're winners. If not, then they end up like Jia Yueting."

Tu Xinquan of the University of International Business and Economics in Beijing says China's tycoons arose during the past two decades of rapid economic growth, which produced bubbles in the stock and real estate markets.

Chinese government regulation, meanwhile, was relatively lax. Loopholes allowed for a minimum of corporate disclosure, so the ownership of some of China's biggest conglomerates remains a mystery.

Many tycoons, Tu adds, got rich off their access to China's most important government-controlled asset: land.

"These big companies have political connections, so they can get land easily and cheaply," Tu says. "Then they can use that land as collateral for loans and get a lot of money."

Many Chinese tycoons have used that money to snap up companies, land and other assets overseas.

"These officials and tycoons know perfectly well that any money inside China has no legal protection, even if it's legitimate money," says Pei.

These companies will even buy foreign assets at a loss, Tu says, just so they can stash their money overseas.

All this has caused China's foreign currency holdings to shrink. It has also raised the risk of banks collapsing because of too much debt. So China's government has moved to limit the tycoons' overseas buying binges.

Pei says that the tycoons' undoing is related to President Xi Jinping's anti-corruption campaign, which has led to the arrest and jailing of hundreds of current and former officials around the country.

"So this is one reason why some tycoons will have to fall," he says, "because they are just so closely connected with those people who have lost power."

In fact, a major stockholder in LeEco was the brother of Ling Jihua, who served as chief of staff to China's former President Hu Jintao. Ling Jihua was sentenced in July 2016 to life in prison on corruption charges, although it's not clear if this had anything to do with LeEco's downfall.

Pei says business executives and officials can often benefit from close connections. The officials get money; the executives get protection.

But the two sides are not equal in power.

Another way of looking at the businessmen, Pei says, is to see them as geese. They've gorged on the patronage of politicians who have now either retired or been ousted in anti-corruption drives.

All that's left, says Pei, is for the new officials to select the choicest birds to cull.

"If you want to kill geese, they're all fattened," he says. "But you really want to pick the ones who you think are most deserving of slaughter."

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