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To Chinese Firm, Access Becomes A Key Commodity

Conglomerate's Leader Boosts Country's Business Ties Abroad

Wang Jun has sipped coffee socially with President Clinton, met informally with Morihiro Hosokawa when he was Japan's prime minister and chatted with Philippine President Fidel Ramos. He golfs with China's business elite and hobnobs with its political leaders. And he frequents, and chairs, the pricey Capital Club, a dining spot perched at the top of one of Beijing's tallest buildings.

Wang's key to this select company: his chairmanship of the China International Trust and Investment Corp. (CITIC), the most influential financial and industrial conglomerate in China.

Founded at the dawn of the late Deng Xiaoping's economic reform era as the government's window onto the capitalist world, CITIC today reflects China's emergence both as a major force in the global economy and as the ultimate potential market for foreign firms with merchandise or services to sell.

This week, while in Beijing to help patch up U.S.-Chinese relations, Vice President Gore watched Boeing sign a deal to sell planes and General Motors agree to set up a new auto manufacturing plant. The size of the GM investment alone far exceeds an entire year's worth of foreign investment during the first years of CITIC's existence.

Mirroring the explosive growth of China's economy, CITIC has ballooned into a sophisticated $23 billion conglomerate with massive holdings in Hong Kong and substantial assets scattered throughout the world, including in the United States. At the same time, because of its size and its impeccable connections, it is avidly courted by the biggest foreign companies – including many prominent American firms – eager to establish or expand operations aimed at China's 1.2 billion consumers.

CITIC owns a steel mill in Delaware, forests in Washington state, and a meat processing company and aluminum smelter in Australia. It owns one of China's largest banks and chunks of a myriad of ventures in China: satellites, bridges, power plants, accounting and law firms, pharmaceutical makers, department stores, auto plants and textile manufacturers.

It governs its own island – Daxie Island near Ningbo, south of Shanghai, more than one-third the size of Manhattan – which it plans to transform into a superport. And its Hong Kong affiliate is a major player in the close-knit Hong Kong business world, providing political reassurance while muscling its way into bigger roles in the territory's main utility, telephone company and two major airlines.

Since the revelation that Wang attended a Feb. 6, 1996, White House meeting for major Democratic Party contributors, where he shook hands with Clinton and exchanged pleasantries, some people in the Justice Department and Congress are wondering whether CITIC's tentacles are reaching into American politics.

Access is a key part of CITIC business, but it is usually the part CITIC sells, rather than buys.

Business people in China say they believe that Wang's visit had more to do with American companies trying to cozy up to China than with the Chinese trying to gain influence in the United States. In an interview earlier this month, Wang said his U.S. trip was initiated by Lehman Brothers Inc., which is competing for a bigger role managing China's new stock and bond offerings.

A Lehman Brothers spokesman said four or five Lehman executives gladly hosted a breakfast for Wang in New York the day after he visited the White House. Said Lehman spokesman Bill Ahearn, "It made perfect sense because CITIC is one of the largest financial conglomerates and we would like to be doing more business in China." At the Wang meeting, one Lehman executive mentioned a Chinese bond issue that a competing investment bank had handled and told Wang that Lehman "would love to do something like that," Ahearn said.

Lehman Brothers is not the only company trying to impress Wang and CITIC. As China's leading "red chip" company, CITIC is the most sought-after partner for "blue chip" foreign firms seeking footholds in China. Its partners include Bechtel Group Inc., Coopers & Lybrand, Siemens AG, United Technologies Corp., Ciba-Geigy AG, Reynolds Metals Co. and Cable and Wireless PLC – to name a few.

One American partner that let CITIC take a small interest in a joint venture said, "It was well worth it." Because of its savvy about both foreign business and Chinese politics, CITIC managed to break through a local government obstacle and bridge a gap between the U.S. firm and local Communist politicians.

CITIC was founded in 1979 at Deng's behest. To head it, he passed over Communist regulars and tapped Rong Yiren, whose family built a fortune on textiles before the 1949 Communist takeover. When most capitalists fled China then, Rong stayed and later became deputy mayor of Shanghai. For a time he still lived in the family's Shanghai mansion. Although Rong was branded a "capitalist roader" during the Cultural Revolution, the name "red capitalist" became a compliment, not a slur, under Deng. CITIC's efficiency and pragmatism contrasted sharply with plodding state planners and lumbering state-owned enterprises.

"CITIC has forged close ties with industrial ministries and economic planning institutions, the central bank and even provincial governments, so if there are any problems in the course of setting up a joint venture, with CITIC it is easier to settle those problems at an early stage," said Wang, who keeps a photo of himself and Rong, now China's vice president, behind his desk and one of him with Deng on the wall.

Wang is the son of one-time vice president and senior general, "Big Cannon" Wang Zhen, who was on the conservative wing of Deng's reform coalition. The elder Wang led the charge against what was called "spiritual pollution" in 1981 and during 1989 demonstrations for democracy, he accused then-Premier Zhao Ziyang of "surrendering to the bourgeoisie" and suggested shipping 4,000 intellectuals from Beijing and Shanghai to Xinjiang for "reeducation."

For the princelings of the next generation, business rather than the military or politics has been the most alluring career. The younger Wang studied at a Harbin engineering school, spent 10 years at shipbuilding plants, and served two years in the military. But he did not join the Chinese Communist Party until 1978, at the age of 39. "It raised a lot of eyebrows," Wang said, "but it's my personality. I don't like to follow orders of superiors." He joined CITIC as soon as it was created.

Now, like many of China's emerging capitalists, he talks about assets and profit margins. He complains about high business taxes. He keeps a computer on his desk. He drives a blue BMW and keeps a golf club in the office. His golf handicap is 14, he said, but he's working on it.

With China awash in foreign investment – more than $40 billion poured in last year – deal makers now seek CITIC. One person who has knocked on its door is former secretary of state George P. Shultz, on behalf of his old engineering and construction firm Bechtel.

Shultz and two Bechtel executives visited Rong in Beijing on the day in March 1993 that he was named vice president. The upbeat Rong proposed that Bechtel join CITIC in building a superport on sparsely populated Daxie Island. Rong contended the plan would ease shipping bottlenecks in Shanghai and spur development throughout central China. As he envisioned it, the port would eventually have more than half the capacity of Hong Kong and be one of the five largest in the world.

Later, CITIC bought the island and won the right to issue permits and approvals, power normally reserved for local or provincial governments. Bechtel is the lead developer with plans for ports, warehouses, railroads, roads, water and electricity infrastructure.

"There's no question that Asia is the hottest developing market for us right now. China by its very size and number of projects it does is very tempting," a Bechtel spokesman said when the deal was announced in mid-1994.

Shultz still cultivates the CITIC relationship. A member of its board of international advisers, he visits often and delivers speeches to CITIC conferences that include China's top leaders.

Nowadays, CITIC can be choosy about its investments. Two years ago, Wang lamented that it was a shareholder in more than 200 Chinese enterprises, many of them flops. A light-sensing company in Xiamen had run up big losses; a textile-and-cotton plant in Heilongjiang lost money. Overall, CITIC's return on its domestic manufacturing investments was zero, Wang said in an interview two years ago.

Since then, the company has focused more on high technology, infrastructure and financial services. Among its projects: a deal with Siemens and Deutsche Bundespost Telekom to set up a phone service company in four cities to challenge the state telephone monopoly.

CITIC has also been wheeling and dealing in Hong Kong, where companies are looking for political cover before the return of the British colony to Chinese rule on July 1. Many leading Hong Kong families and companies are suddenly ready to sell shares to CITIC's Hong Kong affiliate, CITIC Pacific – often at bargain prices.

CITIC Pacific is 26.5 percent owned by CITIC Hong Kong, which is a wholly owned unit of the Chinese parent company. The chairman of CITIC Pacific is Larry Yung, the son of former CITIC chief Rong and now a high-profile member of Hong Kong's business elite.

Earlier this year, CITIC Pacific bought a 20 percent stake in China Light & Power, the colony's largest electric utility. The Kadoorie family, one of Hong Kong's oldest and richest families, which had rebuffed CITIC's overtures in the past, agreed to reduce its stake in the utility to make room. Family head Michael Kadoorie said that CITIC Pacific's "relationships . . . will put China Light & Power in a very strong position" to forge deals in the rest of China. "We believe it is in the company's long-term interest for CITIC Pacific to have a meaningful shareholding interest in the company."

But the deal made many Hong Kong executives wonder whether Chinese companies will exploit their connections to strong-arm old-line Hong Kong firms into giving up choice chunks of the Hong Kong economy.

CITIC Pacific has also increased its stake in Hong Kong's flagship airline, Cathay Pacific, from 10 percent to 25 percent. The buying spree has left CITIC Pacific stretched thin, many analysts say. The company is "up to its ears in debt," said Steven Thompson, senior analyst at Nikko Securities Co. (Asia) Ltd.

The Chinese parent company recently raised eyebrows in Hong Kong when it sold off a 14 percent share of CITIC Pacific to Yung and other managers for about $1.4 billion. The deal was done at a 25 percent discount from the market price of CITIC Pacific at the time, saving Yung an estimated $465 million.

Wang said the deal was made to give CITIC Pacific greater autonomy and flexibility. Asked if it looked unseemly in Communist China for Yung to appear so rich, Wang said that Yung had borrowed most of the money for the stock purchase. Restrictions were also placed on when Yung could sell the shares, Wang said.

"We gave him a big discount, but he will not rest easily because the interest he has to pay to the banks far exceeds the dividends from his stake in CITIC Pacific," Wang said.

Hong Kong has not been the only place that CITIC has ventured overseas in search of investment targets instead of investment funds. CITIC also has two substantial investments in the United States.

In 1988, CITIC bought the Claymont, Del., plant of the bankrupt Phoenix Steel Corp. and renamed the company CitiSteel USA. Despite CITIC's Communist parentage, it soon clashed with the United Steelworkers of America, which had represented the workers at Phoenix. CitiSteel hired an all-new work force and refused to recognize the union. After four years of legal skirmishes, the union essentially gave up its effort to organize the plant. In 1995, the company began to turn around; sales rose 15 percent and profits 30 percent, the CITIC annual report said. The plant has revenue of about $100 million a year.

In the United States, CITIC has a wholly owned subsidiary, CITIFOR, a timber logging company with a mill and at least four plots of forest in Washington state – including three totaling 3,442 acres in Thurston County. CITIC paid $34.4 million for two of these plots and another elsewhere in the state between mid-1993 and mid-1994.

The Chinese central bank has criticized CITIC, saying it has too many long-term investments and not enough liquid assets. The central bank, the Finance Ministry and a state economic reform commission held discussions about CITIC's strategy in November. Analysts say that given CITIC's advantages, its performance is weak. Wang also said that three times last year, state auditors conducted "massive investigations" of CITIC's books to search for improprieties and bad loans but found nothing significant.

"An important lesson my father taught me is to be an upright person," Wang said.

Whether Wang survives such scrutiny, CITIC and its capitalist way of thinking probably will. "In the early days, our business strategy wasn't much in line with government economic structure. The country was still under a planned economy," Wang said. "CITIC was set up to function under market economic principles. We have worked hard to explain those to various departments."

CHINA VENTURES INTO CAPITALISM

Founded as Communist China's window to the capitalist world, China International Trust and Investment Corp. has become China's most influential financial and industrial conglomerate with interests in virtually every type of business at home and abroad.

1996 total assets: $23 billion
1996 profits: $290 million (2.4 billion yuan)

ALLOCATION OF CITIC's ASSETS

Industries, 10%
Real estate, 6%
Telecommunications, 4%
Commerce, 4%
Transport, 3%
Finance, 73%

ALLOCATION OF CITIC's INDUSTRIAL ASSETS

Energy, 17%
Auto/Machinery, 12%
Other, 7%
Raw Materials, 64%

CITIC's MAJOR OVERSEAS HOLDINGS

CITIFOR, forest products
Seattle

CITIC Canada, paper mill, sawmill
Canada

CitiSteel USA Inc., steel mill
Claymont, Del.

Asia Satellite Co. (minority share holder), communications satellites
Hong Kong

CITIC Pacific Holding company (CITIC owns 26% through CITIC Hong Kong). CITIC Pacific owns shares in utilities, airlines, telephone companies and real estate
Hong Kong, Macao, Shanghai

Ka Wah Bank Ltd. banking
Hong Kong

CITIC Australia, trading in metals, chemical products, machinery equipment, agricultural, marine and meat products
Australia

Portland Aluminum Smelter, aluminum production
Australia

CITIC has representative and trading offices in New York, Hong Kong, Rotterdam, Tokyo, and Hamburg,

AMONG CITIC'S DOMESTIC VENTURES

• CITIC Industrial Bank
• CITIC Real Estate Co. Ltd., including a 52-story office building in Beijing
• Zhengzhou Auto Works, produces light trucks
• CITIC Trading Co.
• China International Economic Consultants Co. Ltd.
• CITIC Travel Co., Ltd.
• CITIC Development Co.
• Bohai Aluminum Industries Ltd., which produces aluminum foil
• Daxie Island Superport development project
• CITIC Guoan soccer team in the Chinese Football League
• CITIC Publishing House
• Five power plants
• A global satellite mobile phone system