New Probe Rattles Shanghai Corporate World

Shanghai probes former Bright Food chairman

The national string of investigations against executives at major Chinese firms appears to be going local, with word that a man associated with some of Shanghai’s biggest companies is being probed for corruption. In this case the person under investigation is Wang Zongnan, whose name is tied to such Shanghai giants as the Lianhua (HKEx: 980) supermarket chain, as well as food products giant Bright Food. This latest case has several major potential implications, showing local investigators may be joining Beijing’s anti-corruption campaign that began a year ago. At the same time, the investigation could also ultimately cast doubt on several major recent cross-border acquisitions by Bright Food.

According to the latest headlines, Wang is being investigated by Shanghai prosecutors on suspicion of taking bribes. (English article) He is also being investigated for alleged misuse of public funds during his time as a top executive at Lianhua Supermarket Holding Co and Shanghai Friendship Group (Shanghai: 600827), according to a statement on the website of the Shanghai Municipal People’s Prosecution Service.

Wang held the top spot at Lianhua from 2003 to 2006 and was chairman of Shanghai Friendship from 2000 to 2006. The overlap of his time at the 2 companies reflects the complexity in the ranks of top executives at major state-run Chinese firms, which are almost always led by top Communist Party officials. The fact that Wang led 2 such major firms at one time almost certainly reflects his close ties with the Shanghai city government. He later became chairman of Bright Food, another of the city’s largest enterprises, though he resigned from that post in November.

A top Lianhua executive was in the headlines over similar allegations last year, when the company announced that former company official Dao Shurong was being investigated by the State-Owned Assets Supervision and Administration Commission of Shanghai. (previous post) This latest probe doesn’t appear to be related, though it does seem to show that locally-based investigators are joining the Beijing-led drive to root out corruption among government officials and top executives at state-run firms.

To date, an ongoing series of probes has netted top officials at some of the country’s biggest corporate names, including leading wireless carrier China Mobile (HKEx: 941; NYSE: CHL), oil giant PetroChina (HKEx: 857; Shanghai: 601857; NYSE: PTR) and Chalco (HKEx: 2600), China’s largest aluminum producer. Most recently an official at China Resources Holdings also came under investigation.

Wang cited health reasons for resigning from Bright Food last November, and this latest investigation appears centered on his earlier service at Lianhua and Shanghai Friendship. But an expansion of the probe to Wang’s tenure at Bright Food could easily come in the present climate. Such a probe would have implications for some of the company’s billions of dollars in recent overseas acquisitions, perhaps raising questions about whether money was illegally exchanged to close some or all of the deals.

Bright’s string of purchases includes a 2012 deal that saw it pay about $1 billion for 60 percent of leading British breakfast cereal maker Weetabix, and also its 2011 purchase of a controlling stake in Australian biscuit maker Manassen for $400 million. Most recently Bright agreed in May to buy a controlling stake of leading Israeli dairy Tnuva for an estimated $1.4 billion. (previous post) That deal was already sensitive in security-obsessed Israel, and it’s quite possible that Wang’s implication in this corruption probe could even kill the transaction.

From a broader perspective, this kind of development shows that locally prominent state-owned corporations could become increasingly vulnerable to anti-corruption probes, as Beijing expands such investigations beyond the big national giants. Major cities like Shanghai, Shenzhen and Guangzhou are likely to take the lead in launching such investigations, meaning big name state-owned companies in those cities could come under the microscope in the months ahead.

The probe could also put a chill on cross-border deals by many of these companies, as foreign firms may be reluctant to become involved with Chinese companies whose top executives could later become the subject of anti-corruption investigations. On the whole, the future could look difficult for major local firms like Lianhua, as their top officials and business transactions come under scrutiny in a national anti-corruption campaign that shows no signs of slowing.

Bottom line: A new anti-corruption probe against a former top official at several Shanghai state-run firms shows such investigations are expanding to the local level, creating potential new business disruptions.

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