In China's Frontier, a Fortune Is Made
With 'Know-Who' and Financing, Yan Became Nation's Second-Richest Man

By Peter S. Goodman
Washington Post Foreign Service
Friday, February 17, 2006

BAOTOU, China -- The Communist Party officials who run this grimy steel town on the grasslands of Inner Mongolia had big ambitions but little finance. So they called in one of China's most successful capitalists, Yan Jiehe, and let him handle almost everything.

Yan used the same plan he has applied across China's vast hinterland in amassing one of the country's largest personal fortunes: His company, China Pacific Construction Group, put up nearly all the money, hired workers and bought materials. On dark and muddy roads, workers added pavement and streetlights shaped like flowers. In the lonely center of the city, they inserted six public squares and statues of Genghis Khan. The city will pay in installments.

Yan's little-money-down financing has gained his company more than $50 billion in construction contracts since it was launched four years ago, elevating China Pacific into the largest private employer in the land, with more than 100,000 workers. Yan was recently ranked as China's second-richest man by analyst Hu Run, whose annual list of the wealthy has become a national event. Yan's personal assets were estimated at $1.6 billion, trailing only the $1.75 billion fortune amassed by Huang Guangyu, founder of Gome, a chain of discount electronics shops.

"I was going to be number one," Yan, 45, said in an interview. "I have villas and apartments in Nanjing and Shanghai. I drive a BMW. I have a Mercedes-Benz, a Cadillac, a Lincoln Town Car. I have everything. But in China, the bigger the tree, the more wind it catches. I knew being listed as the richest man would be asking for trouble, so I pushed to be ranked lower."

The turns by which the former schoolteacher rose to the ranks of the ultra-rich demonstrate the frontier nature of China's construction boom and the enormous sums being spent on highways, bridges and skyscrapers. They also show the hybrid nature of business in a land no longer communist yet not fully capitalist and the importance of cultivating ties with the local party officials who still determine what gets built.

"In China, it's not the know-how, it's the know-who," said David Chen, chief executive of MKA Capital Inc., an aircraft leasing and finance company based in Shanghai. "The government still controls lots of things. If you're a contractor or a real estate developer, you need a license. You need the land. You need to work with the government and you need people to be on your side. That's why all the nightclubs are full every night and why all the high-end restaurants have private rooms. People are in there talking business."

As word of Yan's wealth filtered into the Chinese press in recent weeks, he has tasted controversy. Critics assert that he built his fortune by exploiting the vanity of officials in backward places, sating their hunger for trophy projects when they should be investing in services for the poor.

"I hate businesspeople like Yan," said Zuo Dapei, a senior economist at the Institute of World Economics and Politics of the China Academy of Social Sciences in Beijing. "They are making fools of local government officials. In remote areas, many officials are unsophisticated, and their good intentions can be exploited by shrewd businesspeople. But others are just acting. When bribes are involved, they just pretend to be foolish."

Yan acknowledged that he targets "remote, underdeveloped provinces" lacking in finance and construction expertise. He said he fronts the costs because that allows him to make deals directly with local officials and avoid competition, enjoying average profit margins of 35 percent. "It makes the profit margin much higher when you have no competitive bidding," Yan said.

Yan made no apologies, portraying himself as a rainmaker able to spread urban development far from China's wealthier coastal areas.

"Local governments often don't have much capital, but they really want to build infrastructure," Yan said. "So my model is very popular. Before, I had to approach local governments. Now, they come to us."

In the past two years, the central government has limited investment to slow the pace of growth in China, fearing that a potentially disastrous real estate bubble is being fueled by loose credit. Beijing has frowned on Yan's approach, asserting that it finances roads to nowhere, fortress-like government buildings and other boondoggles. In January, the central government banned such financing.

"The decree aims to curb the obsession with infrastructure projects," said Liu Fuyuan, deputy director of the Academy of Macroeconomic Research in Beijing, a unit of the state Development and Reform Commission, which guides economic policy.

Still, Yan expressed confidence that business would roll on. "I've secured all these contracts and they are going to be completed," he said. "China is so big that you cannot have one rule for all places. Americans have very strict laws, but China has very flexible laws. And where American companies focus on business issues, Chinese enterprises focus on personal relationships."

Yan was born in 1960 in the coastal province of Jiangsu, the youngest of nine children. His parents were schoolteachers. They occupied a comfortable brick house near the home of the premier and diplomat Zhou Enlai. But as the chaos of the Cultural Revolution exploded in the mid-1960s, Yan's family was sent to a poor village. There, they lived without enough blankets to cut the winter chill, subsisting on rice husks normally reserved for pigs.

"After all those hardships, I wanted to live a good life," Yan said in the interview, reclining in a leather-backed chair in the library of a five-star hotel in Shanghai. Trim and casual with slicked hair, he wore a zippered jacket, dark slacks and black leather loafers.

In his 20s, Yan was a schoolteacher on track to become an administrator at a high school in his hometown of Huaian. His wages were about $150 per month, plus health insurance and a pension. But in 1986, with China early in its economic transformation, he joined those "jumping into the sea," relinquishing the stability of the state system for the new business world.

He took a job as a clerk at a local cement factory, earning a mere $10 a month. His relatives fretted. But three months later he was appointed manager, securing $500 a month and a perch from which he would amass an empire.

Yan expanded into the construction-materials business by taking over a bankrupt state-owned collective. In 1992, he won a $1 million road-building contract in Nanjing, the provincial capital. The following year, he got the rights to build a section of a new highway linking Shanghai to Nanjing. He launched his first private business in 1995, Jiangsu Pacific Engineering Ltd., a construction company focused on projects in the province.

The business model that would make Yan rich took shape in 2002 with the launching of China Pacific. Yan took control of 17 state-owned companies with assets exceeding $750 million, according to the state press. In many instances, he bought them without putting up any cash by packaging successful operations with bankrupt factories, relieving local officials of having to pay pensions to retirees and compensate fired workers.

In China, many private businesses have been launched with assets from state-owned firms. Yan declined to detail where he got his capital.

"When one project succeeds, I invest the winnings in a bigger project," he said.

In Baotou, a broad city laid out on a grid where the grasslands yield to the desert, Yan found a willing customer. The area has substantial precious metal deposits. Officials want to develop roads to attract investment. They had in mind a concrete overpass linking the regional highway to their downtown.

"It's our grand entranceway," said an official in the city's Ministry of Transportation, who spoke on condition that he not be identified, citing rules barring unauthorized contact with foreign journalists. "The overpass gives visitors the impression that we are a civilized city."

Baotou first put the project out for bid, awarding a contract to a state-owned company. But capital controls deprived that firm of needed bank finance, opening the way for Yan.

Since setting up an office here in the spring of 2004, Yan and his representatives had feasted with local officials inside traditional Mongolian yurts, toasting with porcelain cups of horse-milk liquor and dining on such local delicacies as stewed camel's foot. In the fall of 2004, Yan's company landed a $23 million contract to build the overpass. The job was finished last July.

Next, Yan's firm renovated a boulevard known as "Corruption Street," its sidewalks lined with karaoke lounges and massage parlors. It built a 10-lane strip of concrete linking City Hall to the railway station, then added lights and a grand entrance to the government center. This year, China Pacific plans to put in a riverfront promenade.

For Yan and his company, the isolated city is now the source of contracts worth as much as $1.5 billion.

Honest money, Yan said. "All the Chinese media has been questioning whether I've gotten my contracts through closed-door dealing. But the prosecutor has never come to look for any trouble. Everything is transparent."

Special correspondent Eva Woo contributed to this report.

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