How high-rolling ex-con Li Zeyuan is able to buy Shenzhen Airlines for RMB 2.72 billion without cash; “I don’t have money. I’m just foolishly bold.”

07.12.2013 17:25

How an Airline Buyer’s Buddies Crashed, Burned

A high-rolling ex-con who used his connections to buy Shenzhen Airlines without cash is losing altitude in court

By staff reporters Fu Yanyan and He Xin


Eight years after Li Zeyuan bought an entire airline, earning the wings he still wears today as a legendary investor, the 60-year-old was breathing with an oxygen mask and fighting tears while pleading innocent in a Beijing courtroom.

Li no longer controls Shenzhen Airlines, although he remains on staff as a generously paid senior consultant. He’s also a well-connected financier and ex-con who was in and out of prison before raising via questionable — officials say illegal — means  2.72 billion yuan to buy Shenzhen Airlines.Li’s holding company, Shenzhen Huirun Investments Co. Ltd., acquired a 65 percent stake in the nationwide carrier in a May 2005 auction, frustrating more prominent bidders, including CITIC Group and Air China.

Authorities say Huiran, set up in March 2005 with registered capital of a mere 10 million yuan in borrowed cash, was little more than a shell for a financing scheme that funneled borrowed money into the deal. And Li raised the cash by massaging his personal connections to high-ranking military, government and business leaders.

“I don’t have money” personally, he said. “I’m just foolishly bold.”

The airline succeeded, winning Li respect for his business savvy. Today, Shenzhen Airlines operates a fleet of nearly 100 aircraft, and serves 135 domestic and international routes. But since 2010, Huirun has been only a minor stakeholder while Air China holds a 51 percent stake.

One morning in late 2009, police stopped Li on a highway while he drove to Chongqing from Hunan Province. He was detained and held until last April, when he was brought to Beijing to stand trial with five other former Shenzhen Airlines executives, including ex-chairman Zhao Xiang and former China Southern Airlines chief Li Kun.

Each man was charged in Beijing Second Intermediate People’s  Court with embezzling some of the more than 2 billion yuan tied to the airline takeover. Prosecutors say Li, for example, fleeced the airline to pay back Huirun’s original investors.

Li once admitted that to finance the airline’s takeover he had “borrowed a chicken to lay eggs, borrowed a ship to make a voyage.” In other words, his plan was always based on leveraging what was expected to be growing equity in the airline for new loans, which in turn would be used to pay down debt. Li was confident the company would grow quickly, and his financing strategy, at least for awhile, succeeded.

Prosecutors say the executives embezzled airline funds for personal gain. Li is also charged with breaking his parole requirements, and thus could be forced to serve not only prison time for embezzlement — a crime that carries a maximum life in prison — but also serve the six years remaining on his previous prison term when he was released in 2003.

As of late June, Li had been brought into the Beijing court for three hearings.

At the first hearing in April, an emotional Li suffered a serious nose bleed. He showed up for the May hearing with an IV tube in his arm. And in June, a haggard Li faced judges while wearing an oxygen mask.

As of early July, Li and his former colleagues were awaiting court rulings. There was no timetable for decisions.

Long March

Li Zeyuan was born Li Yishi in northeastern China’s Xingcheng County, Liaoning Province, in 1953. He drew close to an older boy in the neighborhood named Zhao Xiang, who came from a wealthier family.

Zhao attended university and entered government service. Li dropped out of school after his second year of junior high school, then enlisted in the military.

Li says that after he enlisted in 1969 at age 16, he worked as a driver and then superintendent for an officer’s family at a local military academy, which later merged with the National Defense University.

Military records indicate Li served in the 24th Division of the People’s Liberation Army until 1979, when he was transferred to the 38th Division to serve as a deputy director of the Serviceman’s Service Center.

Within a few months, Li was arrested for selling stolen goods and sentenced to two years in prison. But he was not kicked out of the army.

After his release, Li resumed his job with the PLA from which he had launched his illegal trade. Then, in 1983, he was named general manager of the Beijing Military Region Trade Development Co., a government trading company.

Meanwhile, Zhao was serving as deputy mayor for the Liaoning city of Jinzhou. Li leveraged their old boyhood friendship to do business. For example, he managed to win Zhao’s approval for a fertilizer contract that earned him a tidy sum.

Business was good until 1988, when Li was convicted of fraud and sentenced to three years in prison. For a later trial deposition, however, Li said he never went to prison but continued working for the military region’s instruction and guidance team. He said officials at the Guangzhou Military District had rescinded this guilty verdict.

Later, Li worked as a deputy director at the PLA’s Second Artillery Division Logistics Production Department, and did double duty as a director and Communist Party secretary at the Production and Business Administration Bureau, under the Academy of Military Sciences.

By then, Zhao had risen to the position of mayor for the Liaoning city of Huludao. He frequently visited Beijing on official business and was entertained by Li, usually over dinners  with high-ranking military officials.

He was convicted again in 1994 for forging identification documents, fraud and smuggling, and then sentenced by a Military Affairs Court to 15 years behind bars.

Again, though, Li says he never spent a day in jail. Rather, he apparently served time in a military hospital, where he was well enough to receive high-ranking military officials bearing gifts of cigarettes and cash.

Li was paroled in January 2003 and then started transforming himself into a high-rolling financier in Shenzhen, a southern city to which Zhao had moved after retiring from government in 1997.

Li later told a court that in Shenzhen he often entertained Guangdong Province officials — and brought Zhao along. A businessman who worked with Li, but asked to remain anonymous, said the ex-con from Liaoning wore his army uniform trousers and liked to talk about his PLA background. Under terms of his military discharge, he was not allowed to wear the rest of his old uniform.

A subject of pride that Li liked to frequently discuss over drinks was the rescinding of his 1988 conviction. He said he’d been wrongly accused and used as a scapegoat to protect higher-ups. He also said officials had later thanked him for his loyalty throughout the criminal proceedings, and then personally rewarded him.

Leveraging Relationships

While attending a business banquet in early 2004, Li learned that Guangzhou’s Guangdong Holdings Group planned to sell its 65 percent stake in Shenzhen Airlines to Hainan Airlines. He recalls hearing someone say that “if an airline is run by somebody sensible who grows the company, its prospects are quite good.”

Li was intrigued — and he took immediate action. First, he went to see Li Kun, then the general manager of the country’s largest carrier, China Southern Airlines. At Li Kun’s office in Guangzhou, Li was told that Shenzhen Airlines appeared to be in a good position for solid growth. Morever, the company’s potential could be further exploited if, through connections to Beijing, government permission could be obtained for key flight routes.

Hainan Airlines officials, though, had been negotiating with Guangdong Holding to buy the airline. It seemed Li would have only a slim chance to buy Shenzhen Airlines.

Li later testified in court that his friends in high places had the power to recommend support for his airline bid from Guangdong officials. These provincial officials could then use their clout to win approval for his plan from the ultimate decision-makers at Civil Aviation Administration in Beijing.

Other friends of Li’s were used to lobby the Guangdong Development Bank, the parent of Guangdong Holding, to approve the sale.

Testifying later as one of Li’s co-defendants in Beijing, Li Kun said that had been Li’s first contact with Guangdong Development Bank officials including its then president, Li Ruohong.

Li actually spied on Li Ruohong and tracked him down at a hotel while the banker was on a business trip. He waited at the hotel until he had an opportunity to introduce himself.

Thus, in all sorts of ways, Li cultivated connections with the Guangdong government — even on the fly. Once an official working at Guangzhou Baiyun Airport told Li that a vice secretary-general from the Guangdong government would visit the following day to see someone off. The tip helped Li “run into” the official in the airport terminal, buy his  breakfast and arrange a golf outing together.

Li Kun said Li is a skilled mover and shaker who can make the right connections — a compliment Li has never denied. Indeed, while building a portfolio of close connections, Li spared no effort to find special friends who could help him with financing.

At a 2004 dinner in Beijing with high-level officials from the State Economic and Trade Commission, Li met Liu Wenbiao. At the time, Liu was a director at the New China Insurance Co. He also served as chairman for Western Credit Guarantee Co.  Ltd. and Northwest Leasing Co. Ltd.

Liu, also on trial for involvement in Li’s case, testified that Li knew many high-ranking military officials. “He  talked big talk and had a lot of style,” he said. “People said he had a lot of high-level connections.”

Liu said he then decided that “if I could help him, I would.”

Indeed, Liu proved invaluable during the Shenzhen Airlines acquisition process. He introduced Li to New China Insurance  Co. Chairman Guan Guoliang, property company Loncin Group Chairman Tu Jianhua and others. These contacts helped Liu raise nearly 2 billion yuan.

Liu picked up all tabs for the entertainment Li heaped on these and other executives.

In a deposition he made as a witness at Li’s trial, Guan described his first impressions of Li when the two met in March 2005, when he thought highly of Li’s PLA past. He said Liu had invited him to a dinner on behalf of an entrepreneur who formerly served as a “general” with the PLA General Logistics Department. Guan accepted the invitation.

Li remembers that dinner table encounter. He said he addressed Guan and others by announcing that “at the behest of former senior officers, high-level officials, and friends, I have opened an investment company in Shenzhen, and I have recently started planning, with the help of government leaders, to buy Shenzhen Airlines.”

But Guan recalls that Li “was very casual and didn’t act like a general. He was unlike me. So I refused.”

Loncin’s Tu, who also testified at the trial, said that “when I first met Li Zeyuan, I paid all his hotel bills in Beijing. He had resevered several rooms, and the bill came to tens of thousands of yuan. He didn’t have money to eat. He even had me buy him two cars.”

Despite giving each of these men a bad first impression, Li eventually brought them around to his thinking. In time, they agreed to work with him on the airline deal, and he thus completed the first stage of his fund-raising effort.

He also won over Guangdong Liantai Group Chairman Huang Zhenda, whose company engages in infrastructure construction. Huang lined up a loan for 10 million yuan that Li used as registered capital for starting Huirun. As a result, Li managed to control 89 percent of the shell company, while his three partners — personal friends, none of whom contributed start-up funds — each held between 3 and 5 percent.

Li testified that he wanted to help these partners to make a little money. And as he was still under parole when the airline deal closed, Li used a legal motion to entrust Zhao to hold Huirun’s shares in his name, as well as act as the company’s legal representative and chairman.

The Deal Goes Down

Li’s plan to buy Shenzhen Airlines hit a snag when the company’s auctioneer, Shenzhen United Property and Share Rights Exchange, announced that qualified bidders needed assets of at least 1.5 billion yuan. Huirun’s bank account held a fraction of that amount.

A few weeks before the auction, Li pleaded with Liu to help him get backing from Guan at New China Insurance. Guan testified that although he was not impressed with Li, he decided to help because Liu sat on his company’s board of directors.

Guan then called Bright Oceans Group Chairman Deng Wei, asking him for financing for a joint bid for the airline with Huirun. Deng, whose company has businesses in energy, transportation and telecoms, agreed.

Deng also testified at Li’s trial. He said he consulted his company’s legal adviser and determined there were no legal risks to a joint bid. He chose to support Guan as a favor.

Time was running out and the auction was approaching, so the usual due diligence procedures for the airline were ignored. Huirun and Guangdong Development agreed before the auction that due diligence would be performed if and when Huirun took control of Shenzhen Airlines. If any problems cropped up, amendments could be made to terms of the sale.

A confident Li telephoned his representative on the auction floor as the bidding began on May 23, 2005, instructing him that he should arrange to buy the airline, no matter what the cost. The joint bidder, Huirun and Bright Oceans, were up against CITIC, Air China and Shenzhen Total Logistics Co. Ltd.

The auction opened at 1.8 billion yuan, and the bids sent the price soaring until Huirun and Bright Oceans won with an offer that was almost 1 billion yuan above the initial asking price.

Huirun and Bright Oceans were operating under “a commissioned bidding and shareholding agreement,” that said the former would provide all purchase funds, and the latter would not have to pony up capital for nominal shares. Huirun was thus to pay Bright Oceans 9 million yuan for its services.

But Bright Oceans basically shouldered the financial responsibility. The airline’s seller required 30 percent — 816 million yuan — within five days of the auction and another 50 percent within 60 business days. The full amount was to be paid within 90 days.

Huirun’s majority stake in Shenzhen Airlines was put up as collateral against any potential losses incurred by Bright Oceans, a company that is listed in Shanghai.

But after the auction, Deng was upset. He called Guan to complain that Li had “gone crazy” by paying such a high price with no money of his own. He also faulted Li for relying on Bright Oceans to finance the purchase.

But Guan testified telling Deng: “I’m the one who asked you to help, so I can’t just do nothing if something goes wrong.”

Li sweetened the deal for Guan by saying that all of the airline’s future insurance business would go to New China. And he promised a lot of business, predicting annual passenger traffic would rise to 10 million, yielding accident insurance revenues of about 200 million yuan annually. Property and aircraft insurance would add another 200 million annually, he said.

Guan testified that he was excited by these prospects for an additional 400 million yuan worth of business. He thus concluded that if he could help Li get the capital he needed, he could help Bright Oceans and his company.

Under the agreement between New China Insurance and Bright Oceans, the former was to front 400 million yuan for the  Shenzhen Airlines investment through the latter. Bright Oceans would then hold 10 percent of the airline in New China’s name for a year. Huirun agreed to repurchase those shares at the end of a year for 400 million yuan.

In May 2005, Guan transferred 400 million yuan originally set aside for building an office tower to Bright Oceans, which turned around and transferred the funds to Guangdong Holding as part of the first payment. The following month, Guan had Beijing New China Finance and Investment Co. Ltd., of which he was a shareholder, transfer 400 million yuan to Bright Oceans, which then transferred the funds back to New China Insurance for the tower project. A year later, Huirun took out loans to repay Bright Oceans, and New China Finance recouped its investment.

Li used the airline’s prospects for a future intial public offering to convince Loncin’s Tu Jianhua to provide the rest needed for  the first payment. Li testified that to bring Tu on board, he hired Citigroup to draft an IPO prospectus, then carried that prospectus with him whenever he went shopping for a loan.

Tu had another reason for working with Li: His motorcycle manufacturing business was in trouble, and he wanted to seek a new growth point. So he was attracted by the idea of cashing out through an IPO.

On June 19, 2005, a Loncin subsidiary agreed to front Li’s company 400 million yuan for a 40 percent share of Huirun, thus giving it indirect control of 20 percent of Shenzhen Airlines. Some 336 million of that amount went to Guangzhou Holding.

Loncin could have expanded its position by increasing Huirun’s capitalization, or lending money to Huirun with interest. That same month, Guan arranged an 80 million yuan loan to Huirun from New China Finance, capping the 816 million yuan required for the first payment.

Li testified that Guan helped him better understand capital markets and operations. But he still had to come up with more than 1.3 billion yuan in about 60 days. Once again, Guan stepped in.

At the time, Guan was facing a crisis of his own. Officials at the steelmaker Baosteel Group, a New China Insurance shareholder, said he had embezzled large sums of money. Guan wanted to resolve this issue by buying out Baoteel’s shares.

Li helped Guan find well-placed connections who could help. He also intervened in a conflict between Guan and Zhang Hongwei, controller of another shareholder called Orient Group Holding Co. Ltd.

Guan testified that Li was loyal and resourceful. It also helped that he knew many high-level officials.

Guan agreed with Li’s idea to use Shenzhen Airlines shares as collateral for future borrowing, so he convinced Loncin’s Tu to expand his position in Huirun.

In August 2005, New China raised 950 million yuan and combined it with 50 million yuan from Oriental Group subsidiary Oriental Finance Co. Ltd. for a 1 billion yuan loan to Loncin. Loncin then put up its shares in New China as a guarantee, thus helping Guan accomplish his goal by stabilizing New China Insurance’s shareholding structure.

Loncin loaned the 1 billion yuan to Huirun, which put up 89 percent of the company as a guarantee. Loncin retained the option of increasing Huirun’s capitalization to expand its share in the company, or issue the money as debt.

Deep Morass

At this point, Guan and Tu were well over their heads and arguably overcommitted to Li’s airline purchase scheme.

“I got hooked at the beginning,” Guan testified. “Once I got hooked, I was dragged along. In the end, I just wanted to get off the hook.”

Guan said he believed in Li at the time he approved the first payment, but later sobered up. Nevertheless, he said he found it too hard to escape, to get off the financier’s ship after it had set sail. He felt that since he had gotten Bright Oceans and Loncin involved, he simply couldn’t abandon them.

Thus, as of September 2005, Huirun had paid altogether 1.81 billion yuan to Guangdong Holdings. That was less than the 2.17 billion required. But Li convinced Guangdong provincial officials to transfer the Shenzhen Airlines title to Huirun in mid-September — ahead of schedule — using 10 percent of the airline’s stake as collateral.

Under a deal with Zhao, Li agreed that Zhao should serve as chairman of Huirun and the airline. They noted that Li was still under parole.

But Li was hired as a “senior consultant” to the airline,  earning about 3 million yuan annually. Li testified his primary responsibilities include “finding outside connections,” negotiating with government officials and arranging flight routes.

Li testified he was not willing to let Loncin control a stake. He said he and Tu have “incompatible destinies” and feared Tu would “gobble up” the airline.

The following October, Loncin stopped collaborating with Huirun, and demanded Huirun return the 1.44 billion yuan loan. It also called for 300 million yuan in damages, payable by the following June.

Tu later testified that he saw Li as a “huge fraud” who had swindled him. Indeed, Tu for years after the airline deal pressured Li to pay the debt.

Li responded by avoiding Tu, refusing phone calls and text messages. Tu fought back by sending representatives to hang around the airline’s finance department all day, every day, and at night sit outside the homes of Zhao and Li Kun, who left China Southern to become Shezhen Airlines’ general manager.

Liu, who had brought Li, Guan, and Tu together for the deal, went to Shenzhen twice a month and repeatedly urged Li to pay off the debts.

Prosecutors have charged Li, Zhao and others for their roles in the premeditated embezzlement of 300 million yuan from a Shenzhen Airlines-invested real estate project in Chongqing in April 2006. They are also accused of embezzling 600 million yuan from airline funds intended for the purchase of the Dacheng Hotel in Tianjin.

The money illegally diverted from the airline’s accounts, prosecutors say, was used to pay off Huirun debts incurred to buy the airline. As of September 2009, Huirun had repaid the airline only 150 million yuan of the diverted funds.

Meanwhile, Li has been struggling to complete the payments for the airline owed to Guangdong Holding. He’s focused on borrowing money to repay old loans.

On the defense stand, Li said every transaction he has ever made for the airline had the consent of its board of directors. Legal documents filed for the trial indicate that as of December 21, 2007, Huirun had paid 2.226 billion yuan to Guangdong Holding in 11 installments. The company delayed final payments for more than two years.

Li testified that after taking control of the company, he had done due diligence and found a hole in the airline’s books worth about 500 million yuan. As a result, he said, that much money could be properly subtracted from his payment to Guangdong Development.

In 2007, authorities investigated Guan for allegedly embezzling vast sums from New China Insurance. Li smelled danger and ran, he testified, to a mountainside temple. He hid for about six months after pressuring Shenzhen Airlines officials to pay off all debts as quickly as possible.

Guan was eventually convicted, and last year he was sentenced to six years for embezzlement and abuse of power.

After returning to Shenzhen from his temple hideaway, Li found the airline in trouble. He decided that Zhao had been abusing his power as chairman for personal benefit. Since his parole had ended, Li forced Zhao out and took over the chairmanships of Huirun and Shenzhen Airlines.

It was then that Zhao reported Li to the Central Discipline Inspection Commission, the party’s anti-corruption watchdog. Li testified that Hong Kong businessman Gao Jingde helped Zhao file the report.

The two men collaborated after Zhao sold Gao a majority stake in a Shenyang real estate project at a low price.

Public records shows Gao, a native of Sichuan Province, is chairman of the Hong Kong New Henderson International (Holdings) Co. Ltd., a member of the Chinese People’s Political Consultative Conference National Committee for more than 10 years, and deputy director of the CPPCC’s Education, Science and Sports Committee.

Gao has investments across China, and is influential in government and business circles. He is also a close associate of the convicted Guan.

After being released from prison in August 2012, Guan joined Gao’s Hong Kong company as vice chairman and chief executive officer.

Li and four of the five executives awaiting a verdict in Beijing have continued to maintain their innocence. They say no one personally benefited from the funds transfers. Zhao has already pleaded guilty.

As of early this year, Huirun still owed 300 million to Loncin and 500 million to Huang Zhenda’s company.

Li told the court the airline’s business has done well in recent years under Air China. It posted a net loss of 14.1 million yuan in 2005 and a net profit of 279 million yuan in 2009. So the company can afford to pay principal and interest to its creditors, he said, and someday will be completely debt-free.

A court investigation indicated that as of November 2009 — after Huirun took control — the airline had 23.8 billion yuan in assets and 22.8 billion yuan in debts, for an asset-liability ratio of 95.8 percent. Most of the company’s operating capital came from bank loans. Today, Huirun has a 24 percent stake in the airline controlled by Air China. Total Logistics has the remaining 25 percent.

In court, Li repeatedly says he truly wants what’s best for the airline.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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