THERE is a lot that can be read into the Shougang Corp case and the arrest of its Hong Kong chief Zhou Beifang - probably too much. All that is clear is that investment in China still requires a risk premium. Much was made yesterday of the theory that the move signalled more than the end of the Zhou family influence at Shougang: it was also tangible evidience that the Deng era is now rapidly drawing to a close. Otherwise, how could anyone be bold enough to move in on such well-connected businessmen as the Zhous? They are seen as a very political family, with impeccable connections with Deng and his offspring. Zhou Guanwu, Zhou Beifang's father who resigned last week pleading old age, is an old friend of the patriarch; they fought together against the Japanese. He was certainly well past retiring age, which should have been 60, and his extra 17 years of holding the reins of China's largest steelmaker could be seen as a direct result of his connections. And then there is the position of the helmsmen's second son, Deng Zhifang, on the board of Shougang Grand, the Hong Kong-quoted subsidiary of the mainland giant. He was, apparently, invited on to the board by Zhou Beifang himself, a further example of the remarkable guanxi that exists between the two families. The conclusion, therefore, could be that the arrest goes beyond any alleged economic crime, and demonstrates that those now wielding power are prepared to strike against the Deng dynasty as a symbol of their own strength. It is impossible to make any judgment yet on the truth of the allegations being levelled at Zhou Beifang - as yet no one knows clearly what they are - but another angle to the story is that the move represents a warning to the so-called 'princelings' that the days of privilege are over. It could be a blunt reminder that no one is beyond the reach of the law, and anyone suspected of using power for personal profit can expect to have to answer some serious questions. Should they be found guilty, then the consequences would be severe - the penalty for economic crime can be death. The move could also be seen as a warning that the recent anti-corruption speeches go beyond mere rhetoric. Late last month, Jiang Zemen, seen as Deng's heir, stood up in his austere Mao suit and thundered against the evils of corruption, calling for strong punishment. Should this prove to be a politically motivated move, then the implications for Hong Kong and other outside investors are profound. All those with China-based investments should carefully study the power bases of each corporation. Foreigners contemplating direct investment through joint ventures in China will also have to concentrate on the 'political risk' section of their feasibility studies. After all, Shougang itself is an immensely powerful group, with much autonomy. It reports to the State Council, and has even been allowed to form its own bank and approve its own projects. What is clear from last week's moves, and yesterday's necessary suspension pending clarification of the position of locally listed Shougang offshoots, is that those risks remain as strong as ever. The uncertainty over the position of the Zhous inevitably had a destabilising effect on the stocks quoted here, but there was no mechanism to quickly inform Hong Kong investors of the situation in Beijing. Their investments were at the mercy of rumours, unconfirmed reports and general speculation. The Hong Kong stock exchange no doubt did its best to ascertain the facts, but the statements from the companies yesterday will have been small comfort to investors. They will still harbour concerns about the background to the arrest, and what harm that any economic crimes which might emerge have done to local offshoots. Their worries will be of little matter to the authorities in Beijing. Which is why it will pay to remember the dangers of investing in one jurisdiction when events in another can have such a profound influence.
