Print

Mail

wiki links

A cautionary tale for investors in China

The plot of wasteland opposite Beijing's Kunlun Hotel looks like just another construction site.

But legal history is being made here.

China's Foreign Trade Ministry is being sued for the first time after a Chinese firm challenged a ministry edict that stopped its attempt to muscle a foreign partner out of a huge property venture on this piece of prime real estate.

The cast of characters is broad: an ambitious Beijing firm, a Hong Kong developer, a once-mighty Korean conglomerate and a government ministry in a country where money and personal connections have long held sway.

The plot is a cautionary tale for foreign investors rushing into the potentially vast but often fickle Chinese market.

And the conclusion could set an important legal precedent in China's debut year in the WTO.

"This is the first time the ministry has been a defendant in a civil lawsuit," a ministry official said.

Once upon a day

It all started in 1995.

Beijing Second Light Industrial Group and Hong Kong-based Galilee International Holdings agreed to set up a property venture, according to lawyers and court documents.

Galilee International poured US$12 million into the new company for a 60-percent stake.

The Beijing firm took a 32-percent stake representing its rights to the land. A third Chinese company took the remainder.

The idea was to build a vast complex of offices, hotels, apartments and retail outlets in one of Beijing's most prosperous quarters.

In 1996, Galilee helped land a deal with South Korea's Daewoo Corp to arrange US$235 million in loans for the project.

But after sinking in US$35 million, Daewoo was hit by the Asian financial crisis in 1997. It cut off funding and construction ground to a halt, lawyers said.

Then things got messy.

Galilee executives said that in 2000, after failing to restart the project, Beijing Second tried to force Galilee to sell its shares.

The Beijing firm complained to city authorities that the deal was invalid because nearly two-thirds of Galilee's investment was made illegally in Chinese yuan rather than in foreign currency.

Galilee lawyers admitted the firm violated China's foreign investment rules by routing those funds through a company based in the southern province of Guangdong that neighbors Hong Kong.

In August last year, the Beijing Bureau of Industry and Commerce ordered Galilee to "honor" its contractual pledge to invest US$12 million in US currency.

The Beijing Economic and Trade Commission, which had originally approved the venture, went a step further, authorizing the Beijing group to declare Galilee's investment void and wipe out Galilee's shares.

Galilee fought back by filing a slew of complaints to government and Communist Party officials, executives said.

The case caught the eye of the Foreign Trade Ministry, which overturned the Beijing city commission ruling in July, saying flaws in Galilee's investment were no grounds to deprive it of its stake.

Bullying

The ministry and Galilee executives also alleged that Beijing Second had bullied accountants into altering their certification of Galilee's investment in a bid to show they never approved it.

During a recent three-hour hearing in the Beijing Second Intermediate Court, the ministry and its lawyers defended its edict and criticized the Beijing commission's directive as "unfair" to Galilee.

The edict said the city Economic and Trade Commission's directive was "perfunctory and unserious." The ministry said it was based largely on a handwritten note from the Beijing Bureau of Industry and Commerce that claimed to negate Galilee's stake.

The Beijing firm did not take the decision by the powerful ministry, which oversees tens of billions of dollars in foreign investment a year, lying down.

The firm brought an unprecedented civil lawsuit against it, asking the court to stay the ministry's order on the grounds that Galilee had not stuck to its promises.

The court has yet to issue a notice on further hearings.
This story has been viewed 1400 times.