Telecom Arrests May Spell Trouble for Son of Former Chinese Leader

December 29, 2014 5:55 am Last Updated: August 23, 2015 3:05 pm

With the arrests of two high-ranking executives at China Unicom, the anti-corruption campaign that has swept through the Chinese Communist Party over the past two years has now begun targeting the telecommunications sector. In China, politics creates business opportunities, and changes in the political scene bring changes to business.

The first official to go was Zhang Zhijiang, Unicom’s general manager of network construction, on Dec. 15. A notice by Xinhua said he was being investigated by anti-corruption authorities for “violations of discipline.” Then on Dec. 18, Zong Xinhua, general manager of the IT and e-commerce unit, was thrown out—again, under investigation, presumably for graft.

China Central Television also recently accused China Mobile, one of the largest state-run telecommunications firms, of “robbery”—a pointed political accusation of a firm that has long had links to the political tribe of former paramount leader Jiang Zemin.

If this campaign unfolds as others have, these arrests may be the prologue to the targeting of the most prominent figures in the sector, in particular Jiang’s elder son, Jiang Mianheng.

The anti-corruption campaign has been unprecedented in scope. The Xinhua News Agency claimed in June some 80,000 officials had been investigated. In October, it published a list of 55 high-ranking officials who had been cashiered, with close associates of Jiang Zemin dominating that list.

When the campaign goes after someone, it tends to cast a wide net, and all of the target’s associates are investigated, starting at the outside and working relentlessly toward the center.

When the anti-corruption forces unleashed by Party head Xi Jinping targeted former security chief and top Jiang Zemin ally Zhou Yongkang, they first took down his associates in the security apparatus, the petrochemical sector—where Zhou first gained power and wealth, and in Sichuan Province, his first power base.

Before former second-in-command of China’s military and Jiang ally Xu Caihou was purged and arrested, there were a series of arrests in the military, including of close Xu subordinates such as Gu Junshan.

The arrests of Zhou Yongkang and Xu Caihou were earthquakes on the Chinese political scene. A former Politburo Standing Committee member like Zhou was thought to be untouchable and Xu Caihou had been a dominant figure in the country’s military.

But a move against Jiang Mianheng would be even bigger, because he is Jiang Zemin’s son.

Whether Jiang Mianheng will eventually be put in handcuffs and paraded through a courtroom is not yet clear. But just as politics rapidly swept up Jiang Mianheng to prominence in business, now the changing of the political tides seems sure to sweep him out.

‘Hidden Rules’

During the 1990s, the chief of the Communist Party was Jiang Zemin. And as the telecommunications industry went through reform and built sophisticated telephone and fiber optic networks across the country, Jiang made sure that his eldest son, Jiang Mianheng, got a front seat on the action.

In the overseas Chinese-language press, which is free to report on the economic adventures of Chinese officials and their family members, Jiang Mianheng is often known as China’s “Telecommunications King,” because of his extensive interests and control in the industry.

It’s very simple: any major company, if they want to operate without trouble from the government, needs to find a political backer.
— Cheng Xiaonong, former Chinese political aide

“It’s very simple: any major company, if they want to operate without trouble from the government, needs to find a political backer,” said Cheng Xiaonong, a former aide to top Chinese leaders, who completed his dissertation about the politics of Chinese state firms.

“In China the way it works is through hidden rules—in the West, shareholders have the right to supervise the company, but in China they don’t. He who has influence doesn’t even need shares—because they can appoint senior managers.”

The political backer—the Chinese term is “kaoshan,” literally meaning “a mountain to lean on”—of a Chinese telecom that later merged into China Unicom, the company now under scrutiny, was Jiang Mianheng.

The phenomenon of the children of top leaders controlling massive assets—carving up the economy among themselves—has been documented by researchers, though many of the details of these deals remain in the shadows.

An examination of the path to power of Jiang Mianheng represents a typical case study of how business is wedded to politics in China’s economy. He is but one of many family members of top officials to have benefited from his ties to power to control a vast commercial empire—in particular during 1990s and early 2000s, when Jiang Zemin, as leader, presided over the efflorescence of nominally “private” enterprises made fat with foreign investment.

A Quick Start

Jiang Mianheng was born in Shanghai, attending the city’s Fudan University in 1977, where he studied nuclear science. In 1986 he traveled to the United States for a dissertation in electrical engineering at Drexel University in Philadelphia. (According to The Wall Street Journal, he was admitted to the school only after his father contacted Hun Sun, a Drexel professor and old schoolmate of Jiang Zemin’s, which “helped,” Sun said.)

Upon returning to China in 1992, Jiang Mianheng went into business—and politics. Typically, Chinese communist officials are accused of “business and officialdom conspiring”—but Jiang Mianheng was seen as a twist on that theme: “a businessman and an official at the same time,” as described in an account of Jiang Mianheng’s early years by the Hong Kong magazine Xin Shiji

First, Jiang gained control of Shanghai Alliance Investment Ltd., known as SAIL. The corporation officially belonged to the Shanghai municipal government, who established it in September of 1994—but it was widely known simply as “Jiang Mianheng’s company,” according to reporting from China at the time.

SAIL superseded an existing city-controlled investment firm that was aligned with Jiang Zemin’s political frenemy, Zhu Rongji (who served under Jiang as premier). Boosted by Jiang Mianheng’s high-level political ties, SAIL raised money and began making investments in telecommunications infrastructure in the city. But it remained secretive: it had no opening ceremony, didn’t publish business results, and never explained who its executives were.

Wing-Chung Ho, a Hong Kong-based academic, makes clear how politicized this arrangement was: “In 1994, Jiang Mianheng had no experience in management and presumably had little capital and no financial credentials. These two pieces of information supported the widely held view that the setting up of SAIL and the deployment of Jiang Mianheng as its head were mainly due to his princeling background.”

From SAIL, Jiang gained control of nearly 40 percent of the Shanghai Information Investment Corporation, which then was awarded part of the city’s $8.5 billion spend on telecommunication infrastructure, including the vast “Shanghai Infoport” project, according to Eric Harwit’s book, China’s Telecommunications Revolution. The public never found out how his company earned such a huge stake in a massive state asset.

Though on paper he was only a board member of China Netcom, Jiang Mianheng was ‘the actual head of the company.’
The position also allowed Jiang Mianheng to take a seat on the board of China Netcom, at the time a small telecommunications firm that was struggling to compete with the state giant China Telecom, which controlled over 80 percent of the telephone market.

On paper, SAIL held a third of the shares of China Netcom. The chairman of the latter was Edward Tian (in Chinese, Tian Suning), and his efforts at the apparent helm of the company earned fawning praise in the Western press—comparing him to Steve Jobs and Bill Gates—and a case study by professors at Harvard Business School.

But, according to researcher Bo Zhiyue, Edward Tian let slip what many already suspected: that Jiang Mianheng was “the actual head of the company.”

Ho, the Hong Kong academic, demonstrated Jiang’s deft combination of political power with state corporate control in a 2013 case study. Soon after gaining control of Netcom, Jiang secured a $300 million investment from Goldman Sachs and Rupert Murdoch (in apparent contravention of Chinese law, which forbids foreigners holding equity in Chinese telecommunications and information technology firms.)

An office worker talks on a mobile phone in front of a China Unicom logo in Beijing on Jan. 5, 2012. An investigation of the company by anti-corruption authorities is currently underway. (Liu Jin/AFP/Getty Images)
An office worker talks on a mobile phone in front of a China Unicom logo in Beijing on Jan. 5, 2012. An investigation of the company by anti-corruption authorities is currently underway. (Liu Jin/AFP/Getty Images)

The success thus far was nothing compared to what was to follow: in late 2001 and 2002, the state behemoth China Telecom was split in half, and its infrastructure in 10 northern provinces was all handed to China Netcom.

Thus, a mere three years after its founding, China Netcom, with Jiang Mianheng in charge, became the third largest telecommunications company in China. In 2004 it went public in Hong Kong and New York. As Ho writes, “Although Jiang Mianheng was not even a board director, it was widely believed that he still controlled the company.” In 2008, when it was still public, it was worth nearly $26 billion.

Turf War

In 2008, China Netcom was merged into China Unicom. Following internal revelations of Jiang Mianheng’s massive corruption, as documented in leaked State Department cables around 2007, he appeared to lose influence inside the system. However, no action was taken against Jiang Mianheng, and it is far from clear whether he lost his foothold in the telecommunications industry at all.

Lu Yimin, president of China Unicom, waves to the press during a ceremony in Taipei on Jan. 18, 2013. Lu is widely held to be the former secretary to Chinese communist powerbroker Zeng Qinghong, a key member of the Jiang Zemin political network. (Sam Yeh/AFP/Getty Images)
Lu Yimin, president of China Unicom, waves to the press during a ceremony in Taipei on Jan. 18, 2013. Lu is widely held to be the former secretary to Chinese communist powerbroker Zeng Qinghong, a key member of the Jiang Zemin political network. (Sam Yeh/AFP/Getty Images)

The current executive director and president of China Unicom is none other than Lu Yimin. According to Unicom’s website, Lu served for 13 years in the Secretary Bureau of the General Office of the Chinese Communist Party Central Committee—a highly sensitive political posting.

Lu is widely held to be the longtime secretary of Zeng Qinghong, Jiang Zemin’s top hatchet man. “Secretaries” are an important, often informal, part of the Chinese communist system—they manage the affairs of their political master, including their assets, estate, bribes, and access. And they know where the bodies are buried.

According to the 2005 doctoral dissertation of Qing Duan, the structure that the telecommunications industry came to take on during the late 1990s and early 2000s was “largely the turf fight between Jiang Zemin’s protégés and Li Peng’s underlings.” Li Peng was the former premier of China.

“Party incumbents fight fiercely to protect their own turf and prevent their removal from the current establishment,” Qing writes. “Different bureaucrats pull and haul for their personal fame and gains as well as their organizational interests.”

The breakup of China Telecom, in this reading, follows the simple logic of power struggle between communist aristocratic families.

China watchers and businessmen will now be looking to see if the arrests at China Unicom herald a thoroughgoing shake up of the industry.