What Qiu Ziming Wrote: The Zhejiang Kan Group Deal

By Tony Liu
Published: 2010-07-30

On July 23, one of the Economic Observer's Shanghai-based reporters had his name added to a nationwide network of "wanted persons" by local police in Eastern China's Zhejiang province. The decision was made on the grounds that the reporter was suspected of committing the crime of damaging the reputation of a company based in the area.

The journalist, a young man named Qiu Ziming, had written four reports related to the Zhejiang Kan Specialty Material Company (ZKSMC), which is listed on the Shenzhen stock exchange. In the series of reports published between June 5 and July 26, Qiu revealed details about the transformation of ZKSMC's parent firm from a local government-owned company to a private firm.

In his first report, Qiu revealed that during the privatization of Zhejiang Kan Group (ZKSMC's parent firm) during the late 90s, the local government-owned company, which at the time of privatization had total and net assets of 136 million yuan and 7.09 million yuan respectively, was transferred to Wang Bailang and 15 other people at the heavily-discounted price of 890,000 yuan.

The transfer was made in accordance with an asset transfer agreement signed between the local county government and the 16 individuals. The agreement included vague wording in regard to the discount at which the company's net assets would be transferred.

The EO discovered that the agreement was signed in accordance with two county government documents from 1998 and 1999, which both clearly stated that the Zhejiang Kan Group was to be transferred with a 15 percent discount on its net assets.

If calculated on that basis, the Zhejiang Kan Group's transfer price should have been 5.06 million yuan. Therefore, the EO suspected that the company was sold at an excessively low price, amounting to a serious loss of state-owned assets.

However, the EO also discovered that ZKSMC stated in its prospectus that its parent firm was sold at an 85 percent discount, which contradicts the terms included in the above-mentioned local county government documents.

In addition, the EO also discovered that as part of the deal, Wang Bailang, who controls a 46.66 percent stake in Zhejiang Kan Group, and the 15 other individuals who gained control of the newly privatized company, were also provided with a 29,000 square meter plot of land at no extra cost.

Aside from the irregularities surrounding the establishment of ZKSMC's parent company as a private company, Qiu Ziming also wrote about a related-party transaction between ZKSMC and Zhang Lugen, the former deputy director of Zhejiang Kan Group's General office, which the listed company is suspected of misrepresenting.

In August 2003, ZKSMC along with Zhang Lugen and Ji Hao, ZKSMC's chairman, jointly invested 15 million yuan to establish a paper mill - Zhejiang Kaifeng Paper Company.

In September 2004, ZKSMC spent 11 million yuan to acquire Zhang Lugen's stake in the paper company. In an announcement, ZKSMC stated "this is not a related-party transaction; Zhang Lugen doesn't have any connection with ZKSMC."

However, a senior manager at the ZKSMC who has left the company told the EO that during the deal, Zhang was deputy director of Zhejiang Kan Group's general office.

Qiu Ziming also checked the Zhejiang Kan Group's staff records from that period and discovered that Zhang was still an employee of the company at the time of the deal.

Therefore, Qiu reported that the ZKSMC was suspected of making false announcements both to its investors and also the authorities charged with supervising listed companies.

Original Reports:
Economic Observer:
凯恩股份“偷天换日”谜团 (June 5)
Economic Observer: 凯恩股份再调查:隐瞒的关联交易 (June 18)
Economic Observer: 凯恩股份电池业务前景不明 巨额关联交易价值几何(July 19)
Economic Observer: 新华基金被忽悠?4700万元接凯恩股份“飞刀” (July 26)

Statements from the Newspaper
Economic Observer: Statement from the Economic Observer in Relation to Journalist Qiu Ziming 
Economic Observer:
Official Statement in Response to Decision to Revoke Detention Order

Links and Sources:
Zhejiang Kan Specialties Material Co.,Ltd: Official Site
Google Finance: Zhejiang Kan Specialties Material Co. (SHE 002012 )
The Guardian: Chinese journalist accused of harming company's reputation 
China stops journalist's arrest after public outcry 
New York Times:
Police Toss Out Arrest Warrant for Chinese Reporter in Hiding 
Wall Street Journal:
Chinese Reporter Wins Apology From Police 
Global Times:
Cops revoke warrant for fugitive reporter