A night out with the Chinese billionaire builder suing local governments

January 29, 2015, 10:33 AM UTC
Yan Jiehe, Head Of China Pacific Construction Group
Yan Jiehe, head of China Pacific Construction Group, listens during an interview in Beijing, China, on Tuesday, Feb. 8, 2011. Yan is leading a delegation of Chinese business leaders to the United States where they will seek investment opportunities. Photographer: Nelson Ching/Bloomberg via Getty Images
Phtoograph by Nelson Ching — Bloomberg via Getty Images

“This is the first time in China’s five-thousand-year history a private company has sued the government!” says Yan Jiehe, founder of China’s biggest private construction company, Pacific Construction Group, jabbing his hand into the air for emphasis.

Dressed in a dark suit on Wednesday night, he’s standing beside a row of banquet tables at Pacific’s Beijing office, getting ready for dinner with some county officials from Inner Mongolia who want to build new roads. But first, he proudly explains why he’s suing his customers—China’s local governments.

“Most of the governments in our country can be reliable,” says Yan, whose Pacific Group ranked 166 last year on Fortune’s Global 500 and who, along with his son, ranks as the seventh richest person in China with $14.2 billion, according to the Hurun Report. “We have three thousand governments in China, and we’ve cooperated with 1,000 of them. We’ve only had problems with 100,” he says.

Yan Jiehe is in the business of building new cities. People migrating from the countryside to urban areas have been one of the drivers of China’s rapid development over the past thirty years, and Yan has become one of the top builders you call if you’re a local official with a project in mind. In the country’s arid northwest city of Lanzhou, for instance, Pacific flattened mountaintops for the government’s vision of creating a second town center. Yan developed the “build to transfer” model in China, in which Pacific uses its own capital to build roads, bridges, and tunnels. After finishing, it gives governments three years to pay back the funds, which they have—until recently.

I got to know Yan this summer after spending two months profiling Pacific and its rise to the Fortune Global 500 list. He’s inclined to exaggeration, but the breadth of his business is stunning—Pacific revenues in the latest Fortune ranking were bigger than those of ConocoPhillips Inc (COP) and Barclays (BCS). China’s history,of course, includes private businesses taking on governments, but previous cases don’t come close to matching the size or timing—the country’s local governments today are struggling under bigger debt loads than ever before—of Pacific’s complaint.

The company filed suits this month against six local governments seeking $160 million it was never paid for finished construction. The six cities are located in the provinces of Hebei, Hunan, Yunnan, Shandong, and Guizhou, where Yan doesn’t expect the cases to go to trial.

“In this suit the local government can lose money, but they can’t afford to lose face,” he says, referencing the complicated Chinese concept of avoiding public embarrassment that will probably keep governments from fighting Pacific in court. He expects to negotiate settlements for 60% or 70% of the total owed. China’s Finance Ministry didn’t respond to a request for comment about the lawsuits.

The lawsuits come as pundits increasingly worry about local debt in China. Last fall, the country announced a policy to cap local government borrowing according to a quota set by the State Council, the country’s top decision-making group. It was the latest move to rein in dangerously high debt levels. The International Monetary Fund estimated local government debt at 36% of GDP in 2013, double the level of 2008, and forecast the ratio to rise to half of GDP by the end of the decade.

Yan says the financial strains of local governments are one reason Pacific hasn’t been repaid. (Pacific itself had a low debt ratio as of last year and isn’t relying on repayment.) But there are other factors. The first, he says, is that some local officials just don’t obey contracts and respect the law. After three or four years, leadership changes and new officials don’t want to be held responsible for previous projects.

The second, he says, is that some officials expect a bribe. Yan has said previously Pacific never bribes officials, mostly because it’s just bad business—the bribes would never end. “The industry we’re in is the dirtiest one,” he told Fortune this summer. “What really happens is that if some people bribe officials, they get imprisoned.”

But is it good business to sue your customers? And name them in the press? On this, Yan doesn’t seem worried. China’s fourth plenary session of the 18th Communist Party of China was dominated by talk of the rule of law, he says. He says he’s trying to get some governments to uphold it.

Later in the night at Pacific’s Beijing office, at a banquet table seating sixteen, the Inner Mongolian officials are celebrating with twenty dishes, including salmon and tuna sashimi, and expensive bottles of the Chinese grain alcohol bai jiu. The ostensible reason for their visit to Beijing was to talk about Pacific building roads. But Yan confided that Mongolian culture was his favorite of China’s minority groups. They spent the afternoon talking about Mongolian song and dance, and Chinese philosophy. After a few rounds of bai jiu shots, one of the officials stands. “We Inner Mongolian people aren’t too good at expressing with words,” he says, “but we sing.”

A woman belts out a favorite, and everyone claps along.

The Inner Mongolian county head Bu He Chao Lu says he is one year younger than Yan and, after more bai jiu, says he reveres Yan like an older brother. More drinking follows. Everyone is smiling. Yan appears to have won his next customer.