FINANCE: Fosun’s Missing Guo Illuminates China Transparency Gap

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Bottom line: Beijing should make investigators be more transparent when making publicly visible moves like detaining company executives, or risk financial turmoil when markets are left to try and guess what’s happening.

Transparency needed when big execs are detained

Beijing’s anti-corruption campaign took an unexpected turn into the private sector last week with the sudden disappearance of Guo Guangchang, one of China’s richest men and chairman of one of its most successful private conglomerates, Fosun Group. Word of Guo’s disappearance sparked widespread speculation and also some panic among investors in his dozen listed companies, forcing the group to scramble for answers to avoid financial chaos.

The case highlights the need for greater transparency by anti-graft investigators as they dig deeper into China’s corporate realm to root out corruption that has become all too common in the nation’s business culture.
Those investigators should be praised for their broader efforts to clean up the business environment, since such practices undermine any market economy and could ultimately stifle economic growth. But at the same time, investigators have a responsibility to be more transparent about their work when it involves publicly visible steps like raids on corporate offices or the arrest or detention of major company executives like Guo.

China’s anti-corruption drive has gone through 2 major phases and could be set to enter a third, following its launch 2 years ago by Beijing. The first phase saw investigators target government officials for crimes like accepting bribes and expensive gifts in exchange for favors using their positions. The second saw the campaign move into the state-run corporate sector, targeting officials at a wide range of companies like energy giant PetroChina (HKEx: 857; Shanghai: 601857) and consumer products heavyweight Bright Food.

Up until now the campaign had largely steered clear of China’s vibrant private sector, which is far more commercial than state-run companies and thus less prone to such corruption. The handful of private sector cases that have occurred were mostly launched by companies themselves, with names like Baidu (Nasdaq: BIDU) and Huawei revealing internal investigations over the last 18 months. (previous post) Those cases all netted regular employees and mid-level managers, and none claimed any top officials as victims.

That contrasts sharply with Guo’s disappearance last week. Unlike most similar cases to date where detention of high-level officials was announced through official media, Guo’s disappearance was uncovered by an investigative report in Caixin, one of China’s leading independent financial media. (previous post) The news spread quickly after that, though no formal comment ever came from investigators or any authoritative official media like Xinhua.

The original Caixin report said only that Guo was seen being led away by police, and that all attempts to learn more about his whereabouts or the circumstances of his disappearance were unsuccessful. Subsequent attempts by other media to get more information were similarly fruitless.

Global Ripples

While Guo himself is a huge name in the local private equity world, sometimes called the Warren Buffett of China, bigger concerns quickly spread about the fate of Fosun’s dozen companies that are listed in China and Hong Kong, dealing in everything from pharmaceuticals to supermarkets. The reach of those companies extends well beyond China, following a global buying spree by Fosun’s private equity arm whose purchases over the last 2 years include French resort operator Club Med, a top Portuguese insurer and the landmark One Chase Manhattan Plaza property in New York.

Fosun’s team scrambled to secure temporary halts in all of the group’s various publicly traded entities, but stock in one of its companies traded over-the-counter in New York fell 11 percent after the news came out. Fosun finally issued a statement the next day saying Guo was assisting authorities in an unspecified investigation, and that he was still able to take part in major company decisions. (English article; Chinese article) It added its view that his disappearance wouldn’t have any effect on the company’s normal operations.

The company later held a weekend teleconference where it reiterated that Guo was assisting into an investigation, and his absence wouldn’t have a major impact on the company’s operations. That was followed by word at the start of the week that Guo had returned home, though there were no immediate official confirmations.

The statement and later teleconference may help to ease some investor concerns, though it still wasn’t entirely clear if Guo himself was suspected of any wrongdoing. Notably absent from the dialogue was any comment on the case by investigators themselves or official media, which have typically provided confirmation on past anti-corruption probes into government officials and state-run company executives.

Beijing should learn from this case and open a new page in its anti-corruption drive by providing quick and transparent communication on any publicly visible developments like Guo’s disappearance in major investigations. Such communication is regular practice in the west, and allows investors, business partners and other stakeholders to make informed decisions based on facts rather than market rumors that often lack foundation and ultimately turn out to be false.

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