Reposted from Market Watch

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Controversy over China steel leader in retirement

Zhang Boling | April 15, 2013 | MarketWatch

BEIJING (Caixin Online) — Shan Shanghua once gained notoriety for leading domestic steel mills in negotiations with international iron ore suppliers. The former secretary general of China Iron and Steel Association (CISA) is again getting attention, but this time for darker reasons.

The 67-year-old Shan is facing charges he embezzled state-owned assets before he headed CISA.

Caixin learned that Shan received a notice from Beijing No. 2 Intermediate People’s Court after Spring Festival in February charging him embezzling from the China Metallurgical Industry Planning and Research Institution (MPI). Shan was director of the MPI, a subsidiary of CISA, from 2001 to 2009.

Zhang Siyou, current vice director of MPI, was also charged.

The prosecutor accused the two of stealing more than 4 million yuan ($645,161) from the MPI. Shan is accused of profiting 1.66 million yuan USDCNY -0.1075% .

Shan headed CISA, the government-backed steel industry organization, from January 2008 until his retirement in 2011. During his tenure, he participated in major price talks between domestic steel companies and the world’s top iron ore suppliers, and witnessed major changes in the global iron ore pricing system.

Opinions over Shan’s contribution to CISA and the country’s steel industry are divided. His supporters say he was tough in negotiations, but others say he was unprofessional and didn’t understand the industry.

‘Legal income’

In a recent interview with Caixin, Shan denied the prosecutors’ allegations.

“When I left the MPI in 2009, there was a compulsory audit and there was no problem found,” he said.However, since his retirement, regulators have received reports from MPI employees alleging corruption. This triggered an investigation in 2010 by the disciplinary inspection office of the State-owned Assets Supervision and Administration Commission.

Afterward, Shan and 10 other MPI employees were required to return a total of 4 million in bonuses. SASAC decided not to turn the case over to the courts.

However, the next year prosecutors launched another investigation which also involved the State Anti-corruption Bureau. Then in March 2012, Shan was asked to post bail and await trial.

Prosecutors say that between January 2005 and October 2008, Shan and Zhang falsified financial records and distributed money to MPI employees.

But Shan said the money included some 600,000 yuan for employees’ overtime and 1.2 million yuan in wages paid to retired employees who continued to work for the MPI. It also included 1.4 million yuan paid as rewards to people who introduced projects to the MPI.

The MPI’s regulations say that sources who introduce projects can collect a 5% fee. “It is like commission fee and we reported this to CISA,” Shan said.

“The 1.66 million yuan I earned was legal income” for overtime and bonuses, said Shan. He added that he paid taxes on the money.

However, prosecutor say the payments violated regulations governing state assets and weren’t included in the MPI’s financial reports.

Reform-minded

The MPI’s revenue mainly comes from the government and income from consulting projects.

Shan said the MPI’s largest project involved the Shougang Group’s relocation to Caofeidian, a land reclamation project in the Bohai Sea. The project generated more than 1 million yuan for the institution in 2005.

Over the next several years the steel industry saw rapid expansion, and MPI’s income grew accordingly. “In 2005, consulting income reached 30 million yuan, doubling from 2004,” said Shan.

The increased income and commission payments prompted the MPI to launch a reform. Shan said MPI decided to pay the commission as a bonus to employees and let the employee shared with the sources who introduced projects. The MPI also adjusted the payment system for overtime.

Shan said “the reform was designed to improve efficiency and increase income.” Indeed, the MPI’s profitability improved significantly between 2005 and 2008 as it earned a total of 120 million yuan.

Shan said the bonus payments complied with government regulations.

A source close to the situation said: “Honestly, the new distribution system encouraged young people and improved their income.”

Shan said the key to his case was how the government valued the reforms he made to the bonus system. “Whether the charges will be valid reflects the state’s attitude toward distribution reforms,” he said.

A criticized tenure

Shan’s reputation in the steel industry is mixed. During his three-year tenure as CISA head, domestic steel companies faced surging iron ore prices and major adjustments to the international pricing system, but they never claimed a strong position in setting prices.

In 2008, right after he took the office, Shan led Chinese steel companies against the price increases by Brazilian iron ore supplier Vale, forcing it to cut rates. The episode put Shan at the center of China’s steel industry and earned him a reputation for toughness.

But Shan was also at the helm when Chinese steel makers experienced setbacks in international price negotiations over the ensuing years. Meanwhile, the nearly 30-year-old annual contract pricing system between China and international ore suppliers was terminated in 2009, marking a major change of global iron ore pricing system.

Shan also announced regulations on steel mills’ and trading companies’ export activities of iron ore, triggering debate.

Many people at the steel factories and ore trading companies criticized Shan for lacking flexibility in negotiations and adequate understanding of the sector.

When he retired, an iron ore trader said “it is good news.”

Despite this, one Shanghai trader said “Shan is one of the uncorrupted guys in CISA, despite disagreements on his qualifications.”

For his part, Shan admitted failure in leading the iron ore negotiations. “The talks have never done a good job, and became a mess,” he said.