Argument

A Family Affair

China's princelings are running amok. And Bo Xilai is just the tip of the iceberg.

In today's China, all corruption is relative.

Yes, the demise of Politburo member Bo Xilai has captured international headlines for exposing how political power and family money melded together in Chongqing, his mist- and smog-shrouded pocket of southwest China. While Bo was reviving Maoist nostalgia on his official's salary of about $1,600 per month in a country whose per capita income ranks 121st in the world, his son was renting a presidential-style suite at Oxford and driving a Porsche at Harvard. Bo's elder brother adopted an alias to control $10 million worth of shares at the Hong Kong-listed subsidiary of a state-owned bank. And Bo's wife, Gu Kailai, stands accused of being involved in the murder of her English friend Neil Heywood after a falling out over money.

Yet in a Communist Party notorious for nepotism and which refuses to subject itself to any law, the Bo family's known financial antics were in fact relatively modest. Two of his wife's sisters are worth upwards of a combined $126 million, according to a Bloomberg investigation. But the fortunes of other powerful political clans almost certainly extend into the billions, as a months-long investigation into the business dealings of one of China's most prominent families makes clear. Through years of influence-peddling and investing, multiple sources close to him say, the son of a former Chinese vice president managed to place himself at the center of a variety of lucrative deals across all aspects of China's economy, from coal mines to the stock market to shopping malls, amassing so much money he ended up buying a $32 million family mansion in Australia.

And his success exemplifies the ability of regime insiders to work the system for their own personal gain -- and make a mockery of the legal system in China. Although the private wealth of the party's princelings -- the well-connected sons and daughters of top officials -- is usually well-concealed, they are increasingly dominating the market for blocking and lubricating the arteries of public- and private-sector wealth. Stock exchanges double as vehicles for converting family political capital into cash, which can be re-converted into political power, sometimes by means as blatant as "auctioning" official positions for sale. State-owned enterprises and bureaucracies can be ruled like personal fiefdoms, with contracts allocated to relatives and useful friends, while entrepreneurs shift their profits and loyalties in exchange for regulatory protection.

Some of China's most respected public intellectuals are warning that society and economy are being held hostage to the wealth-maximizing requirements of the political elite. These warnings echo privately in business circles, too, where entrepreneurs continue to be enthralled by the prospects of short-term profits but increasingly alarmed about their personal and financial security. Officials in developed countries, and even Chinese entrepreneurs themselves, report a steep increase in business people and capital leaving China. "Nine out of ten of my business clients are in the process of applying to emigrate, if they haven't already," one of China's most successful investment bankers told me last week (he is in the process of emigrating to Canada). Executives at state-owned companies have grown incapable of acting in the interests of their companies, he says, and China's entire system of allocating resources "is malfunctioning."

Of all the inside deals that abound in China, few compare in scale and audacity to the clandestine privatization scheme that Chinese journalists uncovered in 2007. Caijing magazine discovered that 92 percent of the shares in the state-owned power generating company Luneng, with net assets valued at $9.47 billion, had been secretly transferred the previous year to two unknown private companies for $478 million. When Chinese leaders learned the identities of the princeling children involved, they pressured the magazine's publisher and editor and forced a follow-up article to be recalled as soon as it hit newsstands. Documents cited by Caijing suggest the handful of new owners might have received a windfall gain in the vicinity of $9 billion from the deal.

Foreign Policy has learned that the most sensitive individual involved was Zeng Wei, the then 37-year-old son of former president Jiang Zemin's right-hand man Zeng Qinghong. While details of profit shares, valuations of Luneng assets and debts, and the identity of several other leading families remain disputed, Zeng Wei's involvement has been confirmed by a person integral to the original investigation, business and social acquaintances of Zeng Wei who count themselves as friends, and a recently retired senior official closely acquainted with Zeng Qinghong. The transaction was subsequently unwound but no senior figure on either side of the transaction, including the current head of China's electricity grid company, ranked no. 7 on the Forbes 2011 list of the world's largest corporations by revenue, is known to have faced disciplinary action. Exactly what happened to the $9 billion remains unknown.

It's hard to overstate how crucial Zeng Qinghong was to the ruling elite at the time his son was involved with these machinations: That same year, he brokered the surprise deal that installed Xi Jinping as the president-in-waiting, a masterwork of consensus-building among warring party factions. In 2008, just months after the Xi deal was presented to the Chinese public as a fait accompli, Zeng's son Zeng Wei paid $32 million for a home with a nine-car garage in Sydney, the most egregious confirmed example of a princeling flaunting his wealth. According to a family friend of Zeng Qinghong, the notoriety of his son's financial dealings -- and not only regarding the power company Luneng -- was one factor in his decision to retire after he handed the vice presidency to Xi in 2007. Although Zeng had reached the semi-official retirement age of 68, he also declined the customary honorary positions and confined his power-broking role to giving personal advice only to Jiang Zemin, says the family friend.

The sequence is the clearest example of how the failure of Chinese leaders to curb the crony deals of their children makes them perpetually vulnerable to their enemies and yet collectively secure, knowing that most leading families would not dare support a genuine corruption investigation that could jeopardize them all.

As the lure of the market grows ever greater and the Communist Party refuses to fetter its enormous administrative powers or subject itself to law, ambitious officials and entrepreneurs are increasingly forced to seek the favor of the politically well-connected in order to accumulate and protect their wealth. When contained, the greed this engenders can bind officials together and foster loyalty to the central party apparatus, the ultimate source of wealth and power. But many now believe that the restraint is gone: Corruption increasingly distorts policymaking, sabotages policy implementation, diminishes the leadership talent pool, and taints the party's legitimacy.

China's army of censors and propaganda officials ensure that the private dealings of cadre children never make it into mainland Chinese media. Nevertheless, even China's official mouthpieces acknowledge growing public discontent when it suits them, as they did shortly after the purge of Bo Xilai. "The spouses and children of some cadres have taken advantage of their power to seek personal gains, disregarding the law, thus stirring public outcry," Xinhua noted on April 14.

Even Premier Wen Jiabao, the lone public voice for political reform among top-ranking leaders, has long struggled for credibility in part because of his family's aggressive uses of his position to pursue private business opportunities: His son Winston co-founded the major private equity firm New Horizon Capital and now heads a state-owned satellite company.

Although the incoming president, Xi Jinping, is known for policing the business dealings of his nuclear family, he cannot exert the same control over the families of Zeng and Jiang, the two men who promoted him. Indeed, these and other top Chinese power players stand at the nexus of massive flows of capital; some of their sons and daughters have grown fabulously rich monetizing their abilities as gatekeepers. "This is a privileged group that only bothers talking in billions," says the Zeng acquaintance.


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The last time the Communist Party seriously tackled corruption among the princelings was in 1986, when the country's per capita income was one-tenth of what it is today and officials were tentatively opening themselves to the power of the market. The reformist party secretary at the time, Hu Yaobang, fought to limit the privileges of leaders' children. He even empowered his security apparatus to arrest the son of Politburo member Hu Qiaomu for embezzlement and reportedly supplying pornographic videotapes for sex parties in the People's Liberation Army. A group of party elders who also had children engaged in murky business dealings were disturbed by Hu's audacity. Hu's attempt to limit princeling corruption -- "no matter whose son is involved," as his security chief put it -- contributed to his 1987 purge, according to one of Hu's children.

For the Communist Party, transparency is a cure for corruption, but it could also pose an existential threat. Nepotism, corruption, and specifically the fortunes of leading princeling children fanned the popular outrage that grew into the Tiananmen protests, after the trigger of Hu Yaobang's death in April 1989. Hu's reformist successor Zhao Ziyang responded to protestor demands by offering to have the business dealings of his own family investigated, but he himself was purged shortly before the June 4th massacres. When Zhao's successor Jiang Zemin was helicoptered in from Shanghai to piece the party back together, he brought his former Shanghai deputy Zeng Qinghong into the General Office, the command center of the party.

Jiang occasionally launched anti-corruption campaigns against political opponents, guided by Zeng, but not against those of his own family and supporters. Zeng had two assets that made him uniquely capable of guiding President Jiang through the political and financial labyrinth of revolutionary elders and their children. First was his prodigious intellect and emotional intelligence, according to other princelings. Second were his parents. His father, who had been Mao's ruthless head of internal intelligence in the pre-revolution period, handed his son an intimate knowledge of the details and brutality of inner party struggle, according to a retired Party elder who has written extensively about the father. His mother had run a kindergarten for the children of high-ranking Shanghai cadres, and had bequeathed to him an alumni network of rising princeling leaders.

Zeng became the central go-to man for favors, positions, and advice. He took special care of the children, like Bo Xilai, whose parents had helped president Jiang get the top job and then keep it. He managed tricky rivalries between China's most headstrong princelings, in one case adjudicating between two factions inside the state-owned CITIC conglomerate, each of which was headed by the son of a vice president.

Zeng was known for his ability to engage intelligently and affably on almost any subject with almost anyone. "He is open minded, warm, and tolerant even to dissidents," says Dai Qing, a writer and public activist who is the adopted daughter of a leading revolutionary, and who was jailed for her involvement in the Tiananmen protests. In 1991, shortly after Dai's release from jail, she phoned Zeng, whom she had known since working together in China's embryonic space industry in the 1960s, and received his support to be the mainland-based editor-in-chief of Echo, an independently minded Taiwanese magazine. "Everyone knew he was powerful then -- as Jiang Zemin's ‘right hand' -- and if I had his support then no one could stop my investigations," she says. "Personally, I like Zeng Qinghong. He is a nice guy with a clear mind. But in this system whether you are bad or good there is no way to avoid becoming incapable of action and corrupted."

Ultimately, Zeng signed up to the tradition of the party elders, like Bo Xilai's father Bo Yibo, that loyalty to the party and its founding families transcends individual justice. And Zeng's prodigious powers of persuasion apparently stopped at his own front door: He couldn't control his own son.


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In 1993, Zeng asked a family friend to place his then 24-year-old son Zeng Wei in a Melbourne university because he had been unable to gain a place in China's intensely competitive elite university system. "Let him go out and work, in a restaurant, don't let him lean on others," said the father, according to a source familiar with the conversation. Zeng's friend duly found a financial sponsor in the Chinese community and arranged university admission and accommodation. But Zeng Wei never turned up.

Zeng Qinghong proudly explained to his friend that his son had decided instead to become an ordinary businessman, selling real things that people needed; he had even delivered his father a truckload of watermelons to prove it. He didn't have any inkling that within one year after Zeng Wei's no-show in Melbourne, he had progressed from selling fruit to promoting multi-million-dollar events. A friend recalls seeing Zeng Wei in a corporate box at the Workers' Stadium in 1994, for an exhibition soccer match between the Beijing soccer team and AC Milan, and embarrassing himself by trying to make an introduction with the powerful CITIC boss, Wang Jun. "Wang Jun said, ‘I know him well. Zeng Wei sponsored the game, he invited AC Milan'," recalls the friend."He went from study, to watermelons, to this!"

Ambitious businessmen across the country, including many princeling children of his father's friends, were falling over themselves to cut deals and be seen to be close to the son of China's most important political power broker. Zeng Wei became close friends with Wang Yi, the deputy chairman of the Securities Regulatory Commission, the regulatory body that oversees China's stock markets, according to two friends of the Zeng family. The friendship blossomed as the regulator was discovering it had access to valuable information about state-owned companies seeking to list on China's nascent stock exchanges, and the power to make or break fortunes by providing private companies with listing approvals.

It wasn't just other Chinese that sought favor with powerful princelings. In 1999, Zeng Qinghong was appointed head of the Organization Department, the Communist Party body responsible for appointing all the top provincial heads, ministers, and corporate chiefs in the country. Later that year Rupert Murdoch, early to grasp the potential of the Chinese marketplace -- and the importance of princelings in China's power hierarchy -- got wind that Zeng Qinghong would be touring Australia and rushed across the Pacific to intercept him. Zeng dropped into his Fox studios, where Zeng was introduced to Nicole Kidman and Ewan McGregor on the set of Moulin Rouge. "He had a grin from ear to ear," says a source who accompanied Zeng on the visit.

Zeng then went to dinner at Rupert's son Lachlan's mansion, at Wolseley Road Point Piper, one of the world's most expensive streets. One of Sydney's finest restaurants was closed for the day so that its chefs could prepare a seafood extravaganza featuring huge green lip abalone, to be consumed as the sun set over the Sydney Opera House and Harbour Bridge. Murdoch brought in the Aboriginal singer-guitarist Jimmy Little to perform and the arts consultant Jean Battersby to hang the finest of his Australian works on the walls.

Murdoch was accompanied by his newly wedded wife, Wendi Deng, dressed in a body-hugging green outfit. She performed as Zeng's guide and translator and took the lead in persuading him why News Corporation's Star TV should be beamed into China. "Wendi was definitely running the show," says an official who was present. The official, and another source present say Zeng impressed his hosts with poise, good humor, and engaging curiosity. Zeng returned the hospitality the following year by hosting Murdoch and Deng at the Chinese opera in Beijing.

Zeng was also taken to Brisbane's iconic Breakfast Creek Hotel, where he clearly enjoyed taking off his tie, rolling up his sleeves, and drinking jugs of beer with the local punters and union officials. He spoke engagingly about democracy and China's need for political reform with officials on a Brisbane river cruise. But he was most impressed, it seems, with the Murdochs' stunning Sydney Harbour views. Nine years later, in March 2008, his son bought the $32 million mansion, with an identical harbor vista, diagonally across the road. (Gavan Slaughter, a spokesman who helps take care of Zeng Wei's Sydney residence, said the Zeng family was out of town and "unlikely to respond to questions." A Murdoch spokesman declined to comment.)

Murdoch spared no effort in trying to charm his way into the Chinese marketplace, including via
important princelings. In 1995 he instructed his Harper Collins publishing house to print a hagiographical book about Deng Xiaoping, the late leader of China, written by his daughter, Deng Rong, whose husband ran one of China's main arms trading conglomerates. In 2001, his News Corporation led a consortium with investment bank Goldman Sachs to inject $325 million of capital into China Netcom, controlled by a U.S.-educated entrepreneur named Jiang Mianheng, whom he had been courting. The company was on the verge of bankruptcy but turned to gold the following year when Jiang's father, then-President Jiang Zemin, transferred a third of the assets of China's monopoly fixed-line telecommunications company into a new, merged Netcom entity.

In 2002, Zeng Qinghong was promoted to the Politburo Standing Committee, and then vice president, while his patron Jiang gradually bowed out from frontline duties. Ambitious politicians, officials and entrepreneurs continued to ply the Zeng family with praise and favors, and share in its glory. "Talking about all these princelings taking positions in government and wealth in the private sector, I think it's quite natural and may not be a bad thing," says the Chinese head of a foreign investment bank in China. "If it's not them making money, it would be somebody else." He adds that Zeng Wei is a personal friend who is "honest" and "a nice guy."

Zeng Qinghong's portfolio included managing mainland China's relationship with Hong Kong. His Hong Kong-based brother Zeng Qinghuai earned a reputation for aggressively muscling into business opportunities and facilitating compromises with Hong Kong businesspeople who encountered regulatory problems on the mainland. In 2010, a consortium reportedly involving Zeng Wei, Zeng Qinghuai, and convicted stock market speculators was barred from buying a Taiwanese insurance company. A businessman who knows Zeng Qinghuai says one of his more recent projects is China's tallest building, Shenzhen's recently completed Kingkey 100.

As for Zeng Wei, his business empire stretches to the midwest province of Shanxi, where in recent years he has joined with local coal barons desperately searching for protection from the risk of officials and entrepreneurs further up the food chain appropriating their assets. Business sources say one of his coal-baron partners hosted the wedding of a daughter at a beach resort in March, where the dowry alone reportedly consisted of six Ferraris.

Zeng Wei also grew close to Dai Yong'ge and his billionaire sister Xiuli Hawken, respectively the CEO and largest shareholder of Hong Kong's Renhe Commercial, a company whose competitive advantage lies in winning approvals from a quasi-military agency to convert underground bomb shelters into upmarket shopping centers around China. In 2004 Zeng Wei's dance-school graduate wife Jiang Mei was appointed as a director of an Australian company, Renhe International, alongside Dai and Hawken. In November 2006 Zeng and his wife joined Dai and Hawken as directors of another company in Australia, Fruit Master International. Zeng's wife had been working with Renhe since 2002 and was appointed as a director of the Renhe group board in December 2007, around the time the couple were buying their harbor-side home opposite the mansion that used to be owned by Lachlan Murdoch.

(The price of Renhe corporate bonds has tanked in recent weeks, to 60 cents in the dollar, as investors fret over the value of the company's connection with Zeng Wei. "The value of the underground bomb shelters is equal to the value of the guanxi, and that is not disclosed in the prospectus," says a Singapore-based debt trader at an investment bank. "And if there's a war they have to hand the bomb shelter back.")

In the end, Murdoch's prodigious lobbying efforts failed and he pulled Star TV out of the Chinese market. It seems the lasting legacy of Murdoch's extravagant hospitality to Zeng Qinghong was his son's subsequent decision to join Australia's business migration program. The Zeng family spends most of its time in Beijing, where they have a villa in the comfortable but not overly ostentatious Yosemite compound (developed, as it happens, by Luneng). But Zeng Wei would like his two sons to be educated in Australia, far from the white-knuckle adventures of Chinese politics and business, according to family representatives in Australia, just as his father had wanted him to be.

The risk of regulatory scrutiny, while his father was embroiled in ruthless factional contest involving the former, current and future presidents, may have hastened Zeng Wei's search for an overseas refuge, according to his Beijing friends. Last year Zhang Chunjiang, who ran China Netcom and was close friends with the son of former president Jiang, was given a suspended death sentence for corruption in relation to a subsequent role. In 2010, Zeng Wei's old friend at the Securities Regulatory Commission, Wang Yi, was also sentenced to death with a two-year reprieve for corruption, again relating to a subsequent role. Both sentences are expected to be commuted to life imprisonment, and neither case was explicitly connected with Zeng Wei, but no doubt it gave him pause for thought. The pioneers of princeling politics had been warned.

But then again, Zeng should be fine. The Communist Party has proven over 25 years that it hasn't got the stomach to discipline its children.

China Photos/Getty Images

Cover photo courtesy of the Wall Street Journal

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