The inside story of the Liaoning: how Xu Zengping sealed deal for China's first aircraft carrier

Xu Zengping knew the moment that he saw the hulk of a half-built Soviet aircraft carrier anchored in a cash-strapped Black Sea shipyard that he had to buy it for China.

Standing on the deck of the vessel in the snow and chill of a wintry day in Mykolaiv, Ukraine, on January 28, 1998, Xu, a PLA basketball player-turned-businessman, said he was awed by the strength of the steel leviathan. "It was the first time I had ever been on a carrier and I was overwhelmed [by its size] … I told myself that I should buy it at all costs and make sure it became part of our navy," he said.

The Kuznetsov-class carrier was intended to be the pearl of the Soviet naval fleet when construction began in 1985, but in the aftermath of the USSR's collapse, the Ukrainian government needed to sell it to help dig it out of dire financial straits.

Xu, best known in Hong Kong for his Palace-of-Versailles-style home on The Peak, was on a mission to buy it for the Chinese military. But he had no idea of the costs and the political waters that lay ahead as the vessel made its way from the Black Sea to China, where it would be transformed into the Liaoning, the country's first aircraft carrier.

Speaking exclusively to the South China Morning Post at the South Lake Hotel in Guangzhou, a neglected former guesthouse for the central leadership, he revealed for the first time the price he paid - and says he continues to pay - over two decades for his central role in the mission of a lifetime. "One Hong Kong business friend lent me HK$230 million in 1997 without any guarantee - just based on our friendship and my integrity," Xu said.

THE MISSION

The for-sale sign went up on the carrier in 1992. The Soviet Union had collapsed, the cold war was over and Ukraine's state-owned Nikolayev South Shipyard in the Black Sea was broke. Its one big asset was the carrier - two-thirds completed - and it had to be sold.

One of the potential buyers it reached out to was China. Its navy's armaments department had been looking into adding an aircraft carrier to its fleet since 1970, when chairman Mao Zedong told the country to be prepared for a major conflict with the USSR or the United States. Back then, Beijing had severed ties with Moscow and the US was sending drones over the South China Sea. An aircraft carrier, the navy thought, could be a deciding factor in a war.

The navy formed a team led by General Liu Huaqing in late April 1970 to investigate possibilities, according to the Southern Weekly. Liu proposed that China build its own carrier, but Beijing was wary of the idea - such a project would raise the international community's suspicions over China's territorial ambitions and in any case the country could not afford to research and develop the vessel from scratch.

Buying a ready-made carrier sounded like a better idea. So when Ukraine called in early 1992, the Chinese navy answered by sending a delegation.

Major General Zheng Ming, the former armaments department head of the PLA Navy, was part of the delegation and told Shenzhen Television the carrier looked like a worthwhile buy. "During the trip [in 1992], we found it was a brand-new ship. Everything was completely new, from the armour plating to other parts, so we suggested [the central government] buy it and bring it home," Zheng said. "But the central government didn't do it because of the [political] situation at the time."

With the Soviet Union's downfall and the Tiananmen Square crackdown fresh in foreign minds, then-president Jiang Zemin was pursuing a US-friendly diplomatic line. China passed on the offer that time but some sections of the navy continued to harbour hopes. Four years after the delegation's trip, the carrier was still anchored in the Black Sea shipyard and for sale. It was around that time that 45-year-old Xu, a former captain of the Guangzhou Military Command's basketball team, got the call. Xu was head of Chinluck Holdings, a Hong Kong-based company with interests in trading, catering, culture, entertainment, and property, among others.

Xu made a name for himself organising cross-border cultural events, including a stunt in which late Taiwanese entertainer Blackie Ko drove a car over the Hukou Waterfall on the Yellow River in 1997. He also arranged for military troupes from the PLA, Russia and Australia to put on shows in Hong Kong in the 1990s.

Xu said that when naval officials approached him to buy the carrier on China's behalf, they also warned him of two major impediments: the navy was severely underfunded and there was no support in Beijing for the carrier project. If Xu took on the job, he would be taking a gamble on government policy.

"I was chosen to do the deal. I realised it was a mission impossible because buying something like a carrier should be a national commitment, not one by a company or an individual," Xu said. "But my passion pushed me to take on the mission because it was a now-or-never chance for China to buy a new carrier from a nearly insolvent state-owned Ukrainian shipbuilder."

THE DEAL

Xu got busy. He hired maritime engineers and other experts and installed them in an office in the Ukrainian capital Kiev to lay the groundwork for the purchase. They soon realised the shipbuilder did not want the hulk to be used for military purposes, so Xu's team told the Ukrainians that they would turn the vessel into the world's largest floating hotel and casino.

To that end, in August 1997, Xu set up a Macau shell company, Agencia Turistica e Diversoes Chong Lot, and spent HK$6 million getting the necessary documents for a casino. Four months later, in January 1998, he put his other businesses on the backburner and flew to Ukraine to negotiate with the shipbuilder and government officials.

The deal-making was not for the faint-hearted. Apart from the stacks of US dollars he handed over to the shipyard's management, Xu plied the Ukrainian sellers with fiery, 62-per-cent-proof Chinese liquor called erguotou.

"I felt that I was soaking in liquor back then when I was negotiating with the management of the carrier builder," Xu said. "At every meal I needed to drink two to three litres of erguotou. In the critical four days, I brought them more than 50 bottles. But I still felt I had the energy to do it and was always able to keep a sober mind because my drinking was goal-directed; the Ukrainians were drinking to get drunk."

It all paid off. After several alcohol-drenched days, the shipbuilder and government agreed to sell Xu the carrier - and the ship's all-important blueprints - for the bargain-basement price of US$20 million. They shook hands and arrangements were made to transfer the money.

But what had seemed like a done deal wasn't. In mid-February, Ukrainian officials told him the carrier would be sold through an open auction. Other countries were interested in the ship and he had just three days to put in his bid. The sudden change in the negotiations worked to Xu's advantage - with the help of his Ukrainian friends, he was the only bidder to get his documents ready on time and meet all the key requirements. On March 19, 1998, Xu outbid opponents from the US, Australia, South Korea and Japan and won the ship.

That night an unmarked helicopter landed on the deck of the carrier. Xu did not know who it was but he had his suspicions. Spooked, he arranged the next day to have the 40 tonnes of blueprints for the carrier packed into eight trucks and moved overland to China. The Asian financial crisis meant it took Xu another year to get the money together, but the final payment - including a US$10 million late charge - was made to the shipbuilder on April 30, 1999.

Now, Xu owned the vessel. But he also owned one very big problem - getting it to China.

Tomorrow: Xu Zengping describes steering the Liaoning through a political minefield home to Dalian, the legal and financial price he's paid, and the risks of doing business with the government.