Privatization Crash for a High-Flying Airline

As debt rose, banks tightened. A Shenzhen Airlines insider said the airline began leasing aircraft and selling what it owned. The airline also asked the Shenzhen government for guaranteed loans, and at times demanded subsidies to relieve urgent funding gaps.

After donating 340 million yuan for Sichuan earthquake relief in 2008, for example, the airline asked the Guangdong Province government for an equal amount in subsidies. It also asked the Shenzhen government to back billions of dollars in loans. And a government source said the airline asked the government to provide 800 million yuan in discounts on loan interest rates.

None of these requests for government support were approved. But Li considered the government his lender of last resort.

"Li Zeyuan once said that when no banks would give him loans, the government had to think of a way to help," said one source.

The airline also tried all sorts of private financing options, including foreign bonds, the source said, even attempting private placements in 2008. "None was successful," the source said.

Public security agents moved in last November, arresting Li. The privatization tycoon is being investigated for alleged financial crimes.

Li Kun, the former Shenzhen Airlines president, was taken away March 6 on similar charges.

Investigators are looking at the money trail left by Li's deals, some of which apparently lead to overseas accounts. But one source admitted, "The question is how much can be gotten back."

Meanwhile, Air China is mapping out a new financial trail. The carrier said in its recent statement that a Shenzhen court has accepted a creditors' application for the liquidation of Li's stake in Huirun.

Eventually, a source said, the investment firm may have to transfer its now-minority stake in Shenzhen Airlines to a city government enterprise, marking an absolute dead end for Li's failed privatization.
 
"Li Zeyuan was too bold," a source said. "Sooner or later, he had to get into trouble."

1 yuan = 14 U.S. cents