Beijing Shougang - Its Days of Glory and its Aftermath

Beijing's Capital Iron and Steelworks, known as Shougang (首钢), had been the source of pollution in the Chinese capital for years. With the advent of the 2008 Beijing Olympics, there are indications that it has been downsized or closed down altogether.

Deng Xiaoping (邓小平) visited Shougang in 1992 and apparently praised it as a model for the transformation of the state sector.

Shougang's then chairman who was a long-standing associate of Deng, reportedly obtained a backdoor listing in Hong Kong. With the cash in hand, the chairman announced that Shougang would quadruple its steel production capacity.

The chairman then sent his son to Hong Kong where he eventually listed six separate companies which by 1995, had a combined market capitalization of US $ 12 billion. The son had gone into business with Deng's second son Deng Zhifang (邓质方), and when the two teamed up with Hong Kong tycoon Li Ka-shing (李嘉诚), no one reportedly dared gainsay them.

With the billions of dollars of capital raised by the two princelings, the company expanded in every possible direction - iron-ore trading, metal trading, shipping, real estate projects in Hong Kong and China, computer components and telephone accessories.

It even went into banking, founding the Minsheng Bank (民生银行). In the process it acquired 262,000 employees, 199 factories, 47 domestic affiliates, 27 joint ventures, and sales offices in 18 countries.

According to Jasper Becker, the company shipped an entire steel plant from the United States. It also acquired an iron ore mine in Peru for which it reputedly paid four times the going price, as well as land in Beijing on which to build shopping centers and villas.

As Becker wrote: "The managers of this vast and sprawling conglomerate, the state bureaucrats, behaved as if they were Western tycoons who had created a fortune. They bought fleets of Mercedes and went on holiday to Las Vegas. They took out golf memberships, bought villas, (owned) mistresses, raced horses, and were always seen dressed in Italian suits and speaking into their mobile phones."

What sheer audacity, considering that about 80 per cent of Chinese-made steel did not meet international quality standards!

For Shougang, the end came in 1995 when Deng fell into a terminal coma and his political opponents made their move.

Shougang chairman was dismissed and his son arrested and given a suspended death sentence. The government cancelled all projects aimed at increasing the company's steel capacity.

A new management was also brought in which admitted that Shougang was largely to be blamed for Beijing's terrible air pollution. Hardly surprising, as the plant had failed to invest in even the most minimum pollution control equipment.

Plans were also announced to dismissed 30,000 of its 50,000 steelworkers and to spin off all its subsidiary units - the company bakery, the car pool, the cleaners, the security guards, restaurants, hotels, printing presses, power plants, television stations, and even its opera troupe.

Despite Shougang's fall from grace, its example did nothing to dampen the enthusiasm of many Chinese state-owned enterprises (SOEs). Though hopelessly bankrupt, many continued to list on the stock exchange.

Hong Kong in particular showed a feverish interest in buying these so-called "red chip" stocks.

"Red chips ... are often controlled by Chinese government agencies and thus have strong guanxi or connections in China that allow them to buy assets at bargain prices," reported the South China Morning Post (南华早报) in explaining the popularity of these share offerings.