Family of Chinese regulator profited from insurer’s stock

WEB OF TIES::Analysts said the investments made by relatives of a former central bank head raised more doubts about capital market oversight

NY Times News Service, SHANGHAI

Wed, Jan 02, 2013 - Page 1

Relatives of a top Chinese regulator profited enormously from the purchase of shares in a once-struggling insurance company that is now one of China’s biggest financial powerhouses, according to interviews and a review of regulatory filings.

The regulator, Dai Xianglong (戴相龍), was the head of China’s central bank and also had oversight of the insurance industry in 2002, when a company his relatives helped control purchased a big stake in Ping An Insurance (平安保險) that years later would be worth billions of US dollars. The insurer was drawing new investors ahead of an initial public offering (IPO) after averting insolvency a few years earlier.

With attention to the wealth amassed by families of the politically powerful in China growing, the investments made by Dai’s relatives illustrate that the riches extend beyond the families of the political elite to the families of regulators with control over the nation’s most important business and financial levers. Dai, an economist, has since left his post with the central bank and now manages the country’s US$150 billion social security fund, one of the world’s biggest investment funds.

How much the relatives made in the deal is not known, but analysts say the activity raises further doubts about whether capital markets are sufficiently regulated in China.

“While not per se illegal or even evidence of corruption, these transactions feed into a problematic perception that is widespread in the PRC [People’s Republic of China]: The relatives of China’s highest officials are given privileged access to pre-IPO properties,” said Nicholas Howson, an expert in Chinese securities law at the University of Michigan Law School.

The company associated with Dai’s relatives that bought the Ping An stake was controlled by a group of investment firms, including two set up by Dai’s son-in-law, Che Feng (車豐), as well as other firms associated with Che’s relatives and business associates, the regulatory filings show.

The company, Dinghe Venture Capital (鼎和創業投資), got the shares for an extremely good price, the records show, paying a fraction of what a large British bank had paid per share just two months earlier. The company paid US$55 million for its Ping An shares on Dec. 26, 2002. By 2007, the last time the value of the investment was made public, the shares were worth US$3.1 billion.

In its investigation, the New York Times found no indication that Dai was aware of his relatives’ activities, or that any law was broken. However, the relatives appear to have made a fortune by investing in financial services companies over which Dai had regulatory authority.

In another instance, in November 2002, the same company acquired a big stake in Haitong Securities (海通證券), a brokerage firm that also fell under Dai’s jurisdiction, according to the brokerage firm’s Shanghai prospectus. By 2007, just after Haitong’s public listing in Shanghai, those shares were worth about US$1.6 billion, public filings showed.

Later, between 2007 and 2010, Dai’s wife, Ke Yongzhen (柯永珍), served as chairwoman on Haitong’s board of supervisors.

A spokesman for Dai and the National Social Security Fund did not return telephone calls seeking comment.

Jenny Lau, a spokeswoman for Che, denied by e-mail that he had ever held a stake in Ping An. Lau said that another businessman had bought the Ping An shares and, when faced with financial difficulties, had sold them to a group that included Che’s friends and relatives, but not Che.

The businessman “could not afford what he has created, so he had to sell his shares all at once,” Lau wrote in the e-mail.

However, the corporate records reviewed by the Times show that Che, his relatives and longtime business associates had set up a complex web of companies that effectively gave him and the others control of Dinghe Venture Capital, the company that made the investments in Ping An and Haitong Securities.

The records show that Che was later nominated by one of the companies to serve on the Ping An board of supervisors. His term on the board ran from 2006 to 2009.

The Times last month reported that another investment company also bought shares in Ping An Insurance in 2002, on the same day as Dinghe Venture Capital. That company, Tianjin Taihong (天津泰鴻), was later partly controlled by relatives of Chinese Prime Minister Wen Jiabao (溫家寶), who was then serving as vice premier with oversight of financial institutions.

In late 2007, the shares Taihong bought in Ping An were valued at US$3.7 billion.

The deals involving Dinghe and Taihong are significant in part because by late 2002, Beijing regulators had granted Ping An an unusual waiver to rules that would have forced the insurer to sell off some divisions. Throughout the late 1990s, the company had been fighting rules that would have required a breakup, a move that Ping An executives worried could lead to bankruptcy.

It is unclear whether Wen or Dai intervened on behalf of Ping An, but in April 2002 the company was allowed to reorganize and retain its brokerage and trust division.

Two years later, Ping An sold shares to the public for the first time in Hong Kong. In 2007, after a second stock listing in Shanghai, the value of the company’s shares skyrocketed. Today, Ping An is one of the world’s biggest financial institutions, worth an estimated US$65 billion.

The decision to grant the waiver came after Ping An executives and the insurer’s bankers had aggressively lobbied regulators, including Dai.

The Times reviewed copies of letters written to Dai. In one, Ping An chairman Ma Mingzhe (馬明哲) pleads with Dai to approve an overseas stock offering in 1998, saying: “It would be rather difficult to raise such a huge amount of money in the domestic market.”

The regulatory filings show that Dinghe, the company partly controlled by Dai’s relatives, got an extremely good deal on the shares of Ping An that it purchased.

In December 2002, Dinghe bought 66.5 million shares from Cosco (中國遠洋), a Chinese state-owned shipping giant, paying about US$0.40 a share after adjusting for a later stock split. It was the same price paid by Taihong, the company affiliated with the relatives of Wen. The price was much lower than what the British bank HSBC paid for a 10 percent stake in Ping An in October of the same year. HSBC paid what at today’s exchange rates would be US$1.60 a share.

It is unclear why Cosco would have sold shares at such a substantial discount. The company did not return calls seeking comment.

Dai, 68, has had a long career as a government regulator and as an executive at state-owned companies. He has held high-level positions at the Agricultural Bank of China (中國農業銀行), China Pacific Insurance (中國太平洋保險) and, in the early 1990s, at the Bank of Communications (交通銀行), where he oversaw Haitong Securities, the bank’s brokerage division.

In 1995, he was appointed head of China’s central bank, one of the nation’s most powerful financial posts. He stepped down in December 2002 to become the mayor of Tianjin. Later, in 2008, he was named head of China’s National Council for Social Security Fund. During much of his career, he developed close ties with senior Chinese Communist Party leaders, including Wen, who served with him on the powerful Central Financial Work Commission.

Big financial services companies also sought Dai’s aid in navigating the state’s tight regulatory environment. For instance, Ping An’s longtime chairman, Ma, kept a telephone directory with Dai’s name, as well as the name of his wife and son-in-law, according to records reviewed by the Times and an interview with a former staff assistant to Ma.

In addition, Li Chunyan (李春燕), who once ran Ping An’s Beijing office, last month said in a telephone interview that he set up meetings between Ma and relatives of Dai, including Che.

“I wouldn’t say I introduced them, but I brought them,” he said, declining to give details. “I’m just a small potato, you know.”

“I’m very familiar with the family of Dai,” Li added.

At the National Council for Social Security Fund, Dai began overseeing a huge fund that had acquired stakes in Haitong and Ping An.

In September, the government-controlled social security fund said it would allocate US$3.6 billion to a group of 16 Chinese private equity funds, including New Horizon Capital (新天域資本), a fund whose founders include Wen Yunsong (溫雲松), the only son of the prime minister.