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Facing Public Fury, China Reveals Owners Of Tianjin Warehouse

Last Wednesday’s catastrophic chemical explosion in Tianjin - that at last count had killed 114 people and injured more than 700 - put Beijing in a particularly tough spot at a decisively inopportune time. 

Just two days earlier, China devalued the yuan in an effort to rescue its flagging economy which has stubbornly refused to respond to multiple policy rate cuts. Of course that wasn’t the official line. The PBoC’s excuse for the move is that it’s part of a larger effort to liberalize markets and allow the metaphorical invisible hand to play a larger role in determining everything from exchange rates to defaults. But as should be abundantly clear by the near daily interventions in both the FX and equity markets, Beijing is finding it difficult to relinquish control over the narrative. 

The same dynamic often plays out outside of capital markets. That is, as China’s economy marks a difficult and sometimes tenuous transition towards consumption and services-led growth (i.e. towards a more Westernized system), egregious instances of censorship and the Communist party’s heavy-handed approach to shaping everyday life are seen as evidence that Beijing isn’t truly committed to liberalization.This was evident in the wake of the Tianjin explosion when China moved to shut down hundreds of social media accounts due to the dissemination of "blast rumors." It also appeared as though China was set to leave the public in the dark regarding possible connections between the Party and the owners of Tianjin International Ruihai Logistics. As we noted on Tuesday, "it looks as though determining who actually owns Ruihai will be complicated by the fact that in China, it’s not uncommon for front men to hold shares on behalf of a company’s real owners. This is of course an effort to obscure Communist party involvement in some enterprises."

With all eyes on China in the wake of the devaluation, just about the last thing Beijing needed in terms of shaping its international image and pacifying an increasingly agitated public was to be seen as complicit in a massive coverup of a completely avoidable disaster that ultimately caused the deaths of more than 100 people and may well have far-reaching environmental consequences for the blast zone and beyond. 

So faced with a swelling public backlash, Beijing has embarked on an effort to prove how serious it is about launching a transparent and honest investigation. We certainly doubt anyone was impressed with the fact that a handful of Ruihai executives had been detained but now, it looks like China has compelled the mystery owners whose shares were held on their behalf by front-men, to reveal themselves - and their ties to the Politburo - to the public. The New York Times has the story:

The mayor of the northern Chinese city where huge explosions killed over 100 people last week took responsibility for the disaster on Wednesday, as the authorities sought to contain growing public anger about the accident.

 

“I bear unshirkable responsibility for this accident as head of the city,” said Huang Xingguo, the mayor and acting Communist Party secretary of the metropolis, Tianjin, in his first news conference since the blasts at a chemical warehouse on Aug. 12. 

 

The mayor’s televised mea culpa appeared to signal a shift in the authorities’ response to the political fallout from the disaster. After days of official silence, the government has begun releasing information about the owners of the warehouse company, Rui Hai International Logistics, including their admission of corruption, in an effort to quash public accusations of a cover-up.

 

On Wednesday, China’s state-run Xinhua news agency reported that two major shareholders in Rui Hai had admitted to using their political connections to gain government approvals for the site, despite clear violations of rules prohibiting the storage of hazardous chemicals within 3,200 feet of residential areas.

 

Yu Xuewei, the company chairman, is a former executive at a state-owned chemical company, and Dong Shexuan, the vice chairman, is the son of a former police chief at the Tianjin port. The two executives, who deliberately concealed their ownership stakes behind a murky corporate structure, told Xinhua that they had leveraged their personal relationships with government officials to obtain licenses for the site. Both men have been detained.

 

“The first safety appraisal company said our warehouses were too close to the apartment building,” said Mr. Dong, 34, referring to a residential complex that was severely damaged and now stands empty. “Then we found another company who got us the documents we needed.”

 

The executives established Rui Hai in 2012 but had other people list their shares to avoid the appearance of a conflict of interest. Mr. Yu, 41, admitted that he held 55 percent of the shares through his cousin, Li Liang, the president of the company. Mr. Dong holds 45 percent of the shares through a former classmate.

 

“I had my schoolmate hold shares for me because of my father,” a former police chief who died in 2014, Mr. Dong told Xinhua. “If the news of me investing in a business leaked, it could have brought bad influence.”

Now clearly, these admissions are so straightforward and so obviously scripted that they almost certainly were handed down from above. In other words, rather than risk a series of exposés aimed at determining exactly who was involved in the manangement of Ruihai and how deep their political connections ran (FT had already picked up on the story), Beijing apparently thought the safer route to go was to simply out Mr. Yu and Mr. Dong along with their political connections, and force them to tell the public exactly what it wants to hear in the most unequivocal language possible. 

Whether or not this will be sufficient to quell the growing public discontent remains to be seen, but it's interesting to note that Sinochem, a state-owned chemical company, controls two other warehouses in Tianjin that, as WSJ notes, are "within a kilometer of residences, a hospital, a busy highway, schools and other public facilities, despite rules forbidding such proximity."

In other words: Ruihai is more the rule than the exception when it comes to politically-connected enterprises skirting restrictions on the storage and handling of hazardous chemicals. 

As for what everyday Chinese citizens think about the public admissions of guilt and corruption by Ruihai's major shareholders, we go to Wang Baoshun, a newsstand owner in Beijing who spoke to The Times: "The corruption is like cancer, and we are a patient at a late stage. You can have a few surgeries, but you won’t be able to get rid of it for good." 

We can only hope that the cancerous corruption that helped pave the way for the disaster in Tianjin doesn't end up causing an increased incidence of real cancer among the thousands of people who have now been exposed to toxic sodium cyanide and its gaseous derivative, hydrogen cyanide.