THE JAILED TYCOON BATTLING THE CHINESE STATE / THE ECONOMIST

The jailed tycoon battling the Chinese state

Li Yonghui’s rebellion comes at an inconvenient moment for the Communist Party

By Don Weinland

In late December 1999 Li Yonghui, a 37-year-old businessman, walked out of a military-detention facility near Beijing and onto a plane to San Francisco. 

He had been banned from communicating with the outside world for months and was anxious to see his wife and two young children, who were living in Vancouver. 

First, though, he wanted to visit an old friend, William Yang.

The men had known each other since 1981, when they had shared a cramped dormitory at Tianjin University, where they both studied laser physics. 

After their studies, their paths had diverged. 

Yang had emigrated to Fremont, a coastal city in California, where he became a successful entrepreneur in the field of photonics. 

Li had moved back to his hometown of Shijiazhuang, the capital of Hebei province in northern China, and set up his own truck-leasing business, Kaiyuan Auto Trade.

Although private enterprise was on the rise in China in the mid-1990s, the state continued to dominate; ambitious businesspeople felt they had to get close to local politicians to thrive. 

In 1998 a state-owned firm in Shijiazhuang called International Building asked Kaiyuan for a capital injection. 

It was a crummy deal for Li in financial terms: the state firm paid next to nothing for a 50% stake in Kaiyuan, and Li got a 19% stake in International Building for a much higher cost. 

But Li was excited by the doors it could open for him: according to BusinessWeek, which covered the saga, International Building was backed by two powerful local politicians, the deputy governor of Hebei, Cong Fukui, and the mayor of Shijiazhuang, Zhang Erchen.

Soon after signing the contract, however, Li discovered irregularities in International Building’s books. 

He hatched a daring plan to save his company without backing out of the deal. 

Gradually, he bought up minority stakes in the state firm until he gained majority control—that way he could clean up the company himself. 

But when local authorities realised what he was doing, they detained him.

Li was held in a military compound for 100 days and never formally charged with a crime. 

But he was given an ultimatum: buy back the Kaiyuan shares at a premium and sell those in International Building at a loss. 

He capitulated and was immediately set free. 

It was an expensive deal, but he was allowed to go back to running his company with his reputation intact. 

Meanwhile, Cong and Zhang had been felled by corruption investigations. 

Cong was even sentenced to death, though this was later commuted.

As he waited in Fremont for Li to arrive, Yang wondered if his old friend would be weary and beaten down after his ordeal in detention. 

But when Li showed up, he was full of energy. 

“He wasn’t shook up at all,” recalled Yang. 

“He was upbeat. 

He was thinking about what he could do next. 

All he could talk about was his plans to go back to China and do more business.” 

Li wanted to know how he could invest in Yang’s startup. 

“He’s out of jail for a week and he’s already looking for new investments…This has always been his personality.”

Yang urged Li to give up on China and relocate permanently to the West (Li and his family had already secured Canadian citizenship). 

There was no place in China for private entrepreneurs, Yang told him. 

Little had changed since the Communist Party had seized power in 1949, he warned; the state would take all it wanted from a young private businessman. 

But Li would hear none of it.

A quarter of a century later Yang’s advice seems prescient. 

Li, now 62, is once again being held in detention after another clash with local officials in his hometown. 

By the time of his second arrest Li had become one of the richest men in Hebei province, with a sprawling empire of shopping malls, property and lending institutions. 

It was the last of these that proved to be his downfall. 

After the global financial crisis, lending outside the banking sector exploded in China. 

Shadow finance, as it is known, met investors’ appetite for higher returns and small businesses’ unmet need for credit. 

Shadow lenders flourished in a regulatory grey zone; many of their products were risky, and too complex for retail investors to understand. 

In recent years many have unravelled, leaving investors exposed to hundreds of billions of dollars’ worth of losses.

In 2019 Li was arrested on charges of financial fraud relating to a peer-to-peer (P2P) lending platform he launched in 2014. 

It is unclear whether there are any grounds to believe he really committed fraud or whether, as he claims, local officials are simply trying to scapegoat him for their own bad decisions. 

Either way, the stakes are higher than they were in 1999. 

The crisis at the company has exposed tens of thousands of retail investors to losses totalling around $1bn. 

For the past five years Li has sat in a temporary detention facility awaiting trial—much longer than legal proceedings normally take in China.

What is unprecedented about Li’s case, however, is not the length of his detention or the scale of the losses, but his refusal to disappear meekly. 

Once individuals slip into custody in China they are rarely heard from until their release. 

Not so for Li. 

By dictating to his lawyers, Li has been able to post tirades, laments and calls to arms on social media inside China. 

His campaign has encouraged angry investors to petition local officials, who are widely seen as stalling on the prosecution owing to lack of evidence. 

Compensation can’t be delivered to investors until Li’s case is resolved.

Some of his writings are oblique. 

On May 29th he published a poem about awaiting trial written in classical Chinese, titled “Awaken”. 

“I have accumulated enough strength to set sail,” one line reads. 

“I look upon all of you coolly and ask ‘why?’” 

Other posts are bold challenges to his captors: in recent months he has called out Shijiazhuang’s most senior officials by name and suggested that one day their fates might be reversed.

Li’s prison rebellion comes at an awkward moment for President Xi Jinping, who needs an optimistic private sector to revive China’s sputtering economy. 

In February Xi met private-sector bosses, including Jack Ma, the billionaire founder of e-commerce giant Alibaba. 

Five years previously, Ma’s company had been hit with huge fines and Ma himself forced to disappear from public view after offering mild criticism of risk-averse state banks.

The meeting Ma attended signalled a rehabilitation for entrepreneurs after years of harsh treatment from Beijing. 

A wide-ranging regulatory crackdown had made it clear that China’s tech giants had to do what the party said, and wiped trillions of dollars off the companies’ market values. 

But with China’s economy in the doldrums, Xi has been forced to embrace the private sector.

Li’s case is most embarrassing for local officials, but it also taints Xi’s charm offensive. 

Although the businessman’s name rarely appears in the Chinese press, financial bloggers around the country have taken an interest in his case and comment on each new development. 

Billionaires have been arrested before in China, but the process is rarely this messy. 

The saga has illuminated the risks facing entrepreneurs in China, especially outside the biggest cities.

The tycoon’s jeremiads are hard for the government to ignore. 

Sometimes he appeals directly to Beijing, casting it as more benign than local authorities. 

“Only by setting me free can the problem be resolved, and the only people who can control this are the former and current top provincial officials. 

Might they become historical criminals?”  he pondered earlier this year, implying his country was becoming more just: “I believe that in today’s China I will have a chance to argue this in broad daylight.”

Li was born in 1962 into a farming family in the countryside south of Shijiazhuang. 

He arrived in the wake of a nationwide famine, caused by Mao Zedong’s ruinous economic policies, that had killed tens of millions. 

During his early childhood, Li’s family subsisted on root vegetables; as an adult he refused to eat yams because of the bad memories they evoked.

At university Li was the last student in his class to get a university ID card, recalled a former dorm-mate, who asked not to be named because he still lives in China. 

Li had scraped together the money for a photographer in his village to take his picture for the card, but could not afford for the whole roll of film to be developed. 

So he was forced to wait for the photographer to shoot all the remaining negatives with other clients. 

“He had to wander around without an ID for weeks,” his dorm-mate explains. 

“This left an impression on us. 

We were all poor. 

The whole country was poor. 

But he came from the very bottom.”

Li’s early privations instilled in him a drive to succeed. 

During his third year of university he told his friends he wanted to start a small business selling farm equipment. 

His friends were shocked. 

Although China had become less rigidly dictatorial after Mao’s death in 1976, the state still dominated everything and private enterprise was in a legal grey area.

Still Li pushed on, undaunted. 

In the early 1990s he began buying engines for a tractor company, which allowed him to have the machines on credit as long as he could find farmers to lease them. 

It was one of the first leasing companies of its kind in the country and gave Li the confidence to start Kaiyuan, his truck-leasing business, in 1994.

A few years later, his dispute with International Building, the local state-owned firm, resulted in him being detained for several months. 

His decision to keep doing business in China after his release looked at first like it had paid off: Kaiyuan survived and went on to become one of China’s biggest private truck-leasing firms. 

Private-sector bosses such as Li and Ma were the driving force behind China’s economic miracle of the 2000s. 

Their contribution was recognised in 2001 when businesspeople were allowed to join the Communist Party for the first time.

As the decade wore on, private companies started to make inroads into financial services, which at that time was largely the preserve of the state. 

Ma launched Alipay, a payments platform, in 2004. 

Kaiyuan began to diversify into financial services in 2008 after becoming a publicly traded company in New York. 

Flush with cash, Li built a 53-storey tower in his hometown. 

The Kaiyuan Finance Centre, which until this year was Shijiazhuang’s tallest building, houses a Hilton hotel, expensive office space and Li’s own palatial suite at the top.

Kaiyuan Finance’s P2P lending service, Qingyidai, launched in 2014. P2P lenders collect funds in the form of “investments” from average people who hope to earn higher returns than banks can pay them on their deposits. 

Then they lend those funds to people and businesses, often ones banks have refused to lend to, at high interest rates.

Qingyidai focused on lending to truck companies and drivers; it would fund everything from filling up a tank of petrol to buying entire fleets of lorries. 

Unlike Chinese state banks, which pay lousy interest, Qingyidai could deliver returns of more than 10% a year. 

There was no guarantee that people who put up their life savings would get their money back—but as long as Qingyidai kept paying out, few of its customers seemed to worry.

The rise of Qingyidai coincided with a national P2P euphoria. 

Moguls from all walks of life—from property developers to fireworks-makers—began launching P2P divisions to cash in on the strong demand for credit from people and firms that state-owned banks ignored. 

Unlike banks, these outfits were unlicensed. Some local officials encouraged P2P services or even started their own. 

From 2014, when Li launched his lending platform, to mid-2018, total outstanding P2P loans in China grew 13 times over.

But as lending volumes soared, so did fraud. 

Bosses began absconding with tens of millions of dollars’ worth of investors’ funds. 

In 2016 the chairman of one large P2P lender vanished with about $150m in other people’s money, only to reappear briefly on social media to say “I’ll be right back.” 

It took the authorities two years to track him down.

By mid-2018 defaults had become so widespread that some regional authorities began converting football stadiums into centres where people could formally file complaints. 

Thousands of P2P platforms shut down or collapsed, and countless people lost their savings. 

Loose oversight of the debt-collection industry led to a spate of harassment and violence by mobsters hired to retrieve funds. 

There were many suicides, both among investors and P2P bosses who suddenly found themselves on the hook for millions of dollars. 

According to Joseph Lee Nazzini, a financial law expert at the University of Manchester, the amount of P2P losses that remain unresolved is around 800bn yuan ($110bn).

At first Kaiyuan’s P2P platform looked like a safe bet. Shijiazhuang’s financial bureau announced in mid-2018 that it had investigated Qingyidai and found no irregularities. 

A flurry of new investment followed, much of it from ordinary people in Shijiazhuang. 

One Kaiyuan employee named Wang Linlin recalls how she, her parents and several cousins decided at that time to pool their resources and put 9.6m yuan into Qingyidai.

But without the knowledge of investors, the probe had continued behind the scenes throughout 2018 and into 2019. 

When word of the secret investigation leaked out in summer 2019, people began pulling out their investments. 

Catching wind of the impending crisis, truckers stopped paying back their loans. 

The crunch on capital forced Li to halt withdrawals. 

Angry investors began swarming Kaiyuan Finance’s offices and the company had to open reception centres on two floors of the building to deal with their complaints. 

An employee tasked with manning the phone lines recalls receiving more than 5,000 calls a day. 

At this point Qingyidai had about 77,000 individual investors.

Local authorities started moving against him, but Li was not going out without a fight. 

He launched a public campaign to convince local officials to adhere to a central government edict, announced on November 15th 2019, for the orderly winding-down of P2P companies to protect lenders. 

Under this edict Li should have been allowed to keep running Qingyidai for at least another year as he tracked down borrowers and sued them if necessary. 

But officials in Shijiazhuang wanted to shut down Li’s lending business as quickly as possible.

In early December Li began holding public meetings to address investors’ concerns. 

He explained to them that by halting Qingyidai’s operations, the local government had ignored advice from Beijing. 

In footage of one of his protests, Li can be seen standing in front of local government buildings with a bullhorn, calling out officials by name.

Police battalions began breaking up the gatherings. 

In one video shot on a mobile phone on December 6th 2019, Li stands on a chair above a growing crowd in the entrance to the hotel. 

“Do I not have a right to hold a meeting on my own property?” he asks rhetorically, his hoarse voice rising at times to a frustrated shout. 

Behind him in the Hilton’s porte cochère, a row of riot police in helmets comes into view. 

In another video shot later that day police march in front of the hotel, as if besieging it.

Despite the growing chaos, Li continued his practice of rising before sunrise and taking a brisk walk around his tower before starting work. 

On December 13th 2019, he left his penthouse at the top of the Hilton, accompanied by one employee. 

The temperature hovered just below freezing. 

A series of raids had started early that morning, sweeping up dozens of staff in Shijiazhuang and Beijing. 

Less than a block from the hotel’s main entrance Li was stopped by a small band of local police and quietly taken into custody.

Li is now the longest-serving inmate at Shijiazhuang’s No 1 detention centre. 

Such places are grim. Detention centres in China are meant to hold suspects usually for no longer than two months before trial, and therefore have minimal facilities. 

Up to 20 people live in a single room and sleep together on a large mattress. 

Prisoners subsist on watery vegetable soup with some white rice in it and, if they’re lucky, a steamed bun.

“It has become a face-saving exercise to avoid fessing up to a case that is legally unsound and that has all but collapsed”

It was assumed that the authorities would waste no time trying and convicting Li, but by the end of 2020 the local judicial department had ceased all communication with him and his lawyers. 

It has remained that way ever since. 

Only if Li were to be convicted could his assets be liquidated and handed back to the people of Shijiazhuang. 

Such a process would probably cover a significant chunk of the $1bn in lost investments that still hang in the balance.

His situation has stunned legal experts in China. 

Although the country’s legal system can often be opaque and unfair, judicial authorities and local officials are bound by regulations. 

Most criminal investigations wrap up within two months, and the conviction rate is staggeringly high.

In China suspects can be held without trial for a maximum of seven months. 

For more complex cases this can be upped to nine months, but only if provincial-level prosecutors agree. 

Li’s case has dragged on for so long that the authorities in Shijiazhuang have been forced to beg China’s Supreme Court for multiple extensions to his detention. 

“It has become a face-saving exercise to avoid fessing up to a case that is legally unsound and that has all but collapsed,” said James Zimmerman, a Beijing-based lawyer who has previously worked with the Li family. 

“The longer they hold Li indefinitely, the more this looks like prosecutorial misconduct.” 

Local government officials did not reply to a request for comment on this story.

As Li’s case drags on, his investors have been getting increasingly anxious. 

Some have given up on getting their money back, but many are still actively campaigning, organising protests at government buildings in Shijiazhuang and occasionally travelling to Beijing to submit a letter to the central petition office, the highest office in the country for making formal complaints. 

I met one woman in her 50s who is one of dozens of informal leaders among the investors. 

She is owed nearly 1m yuan and has been stopped from leaving Shijiazhuang because local authorities fear she will create unwanted publicity. 

In January this year an officer from the financial investigations department showed up at her home and asked her to sign a document promising that she would not travel to Beijing to submit a petition.

She has also been subject to late-night visits from uniformed police who question her on camera about her activities. 

“They wore uniforms the first time they paid me a visit and I was scared,” she said. 

“But now I’m not scared anymore. 

I wouldn’t even talk to them if they didn’t have the camera on.”

Politicians tasked with investigating the company have meanwhile seized millions of dollars’ worth of Li’s assets. 

His tower in Shijiazhuang is being run by local officials: the commercial department controls the office space on the lower floors, while the culture and travel bureau runs the upper floors that house the Hilton. 

An executive at one of Li’s companies told me he is now paying to rent office space at a building that his employer nominally owns. 

He also noted that the government lacked the resources to do more than pay the building’s energy bills: “They can’t let the lights go dark in the Hilton.”

For the first four and a half years of Li’s incarceration no one apart from his lawyers or family heard from him. 

Then on July 19th last year a public letter bearing his name surfaced on his company’s social-media account. 

In it he expressed concern for his thousands of investors: “I hope in the future I can take responsibility and prevent everyone’s losses or reduce them.” 

But while he was locked up, he added, “I truly have no way of considering a solution for this problem.” 

It would be the first of many missives. 

Though Li is not allowed to hand over written materials to his lawyers, he has been able to dictate the letters to them, some pages long, during weekly visits.

Two days after Xi met China’s private-sector bosses in February, an open letter from Li was published that approvingly quoted from Xi’s pep talk to them—in particular his line that officials should be “reining in disorderly fee collection, fines, inspections and closures” of privately operated businesses. 

“You only need to earnestly study this one speech of Xi Jinping’s and the problems with my company will be resolved quickly,” Li wrote.

The tycoon’s position is that his company is a poster child for reckless inspections by local regulators and that it was their mistakes that led to the staggering losses suffered by the people of his city. 

If they had followed the law, he says, the mess Shijiazhuang officials now have on their hands would not exist.

Friends struggle to recognise the Li they know in his letters. 

Most describe him as quiet, reserved and slow to speak up. 

Yang, his college friend, remembers him as a studious young man who would curl up in his dormitory bed for days at a time with his textbooks. 

He reckons the dire situation Li has found himself in has led him to become more outspoken. 

“Today he is up against something so rotten and so corrupt,” Yang said. 

“It is very difficult.”

Li’s conditions at the detention centre have improved: he has been upgraded to his own room and is allowed to dine in the officers’ canteen. 

Family members speculate that this is because he has got to know the guards.

In recent months Li has even been able to start a business—and a protest. 

An e-commerce platform called A-Star was launched late last year and is said by Li’s associates to be under his direction. 

He hands over instructions via his lawyers to his colleagues and family members. 

It is unheard of for someone in detention to start and run a company. 

But because Li has yet to be convicted of a crime, he is still able to meet his lawyers regularly. 

This gives him a channel to write letters, manage his affairs and even organise events in the outside world.

In April thousands of angry investors gathered at a government building in Shijiazhuang to agitate for the conclusion of Li’s case. 

Details are murky—but participants say the event was planned by Li from his prison cell. Li has become famous in Shijiazhuang. 

Locals joke—without rancour—that if he doesn’t owe you money then he probably owes your neighbour.

Li claims to have been offered a resolution to the case that would see him leave prison—and his assets liquidated. 

“Plainly speaking there are people who want to take the controlling shares in [my shopping centre] away, take the tower away, to fully clean me out,” Li writes. 

But he is reluctant to admit any culpability. 

“If I agree then they reach their goal and no one takes responsibility,” he writes.

He may have been hoping that this time, unlike in 1999, the local government officials prosecuting him would fold first. 

Several senior cadres who oversaw his arrest in 2019, such as Deng Peiran, Shijiazhuang’s former mayor, have already fallen to internal corruption probes. 

The new mayor, a target of Li’s rants, stepped down in August.

If local officials dismiss the case however, they may find themselves liable for investors’ losses, not to mention the consequences of holding people for years without trial. 

As well as Li, two other Kaiyuan employees appear still to be behind bars. 

Among the others imprisoned was a woman who died of cancer while waiting for a trial. 

Her family was told she was terminally ill after having been given no news of her for four and a half years.

For now, the case is paralysed, with Li determined not to capitulate and local officials lacking an obvious path to close it. 

In August his social-media account began publishing letters signed by his wife and children on nearly a daily basis, something a family member says is a renewed effort to fight for his freedom. 

But new followers have recently been blocked from following Li’s original social-media account and some posts on a new account appear to have been censored. 

His son Spencer says his father’s life has been threatened. 

“To cover up past mistakes and responsibilities,” he wrote online, “some people could take desperate measures.” 

Don Weinland is The Economist’s China business and finance editor. Additional reporting by Cecilia Wang