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The mainland's largest power equipment manufacturer, Shanghai Electric Group Co Ltd, confirmed yesterday that its chairman Wang Chengming had been detained by the authorities and was under investigation. He's the third board member to be detained in the last two weeks.

"Wang is suspected of seriously violating certain rules and regulations of the Communist Party of China and is therefore being detained for further investigations," the company, which used to be actively pursued by Hong Kong investment funds, said in a statement made yesterday to the Hong Kong Stock Exchange.

Last week, Executive Director Han Guozhang and Vice Chairman Zhang Rongkun were detained for questioning.

Trading in Shanghai Electric shares was suspended on the Hong Kong Stock Exchange yesterday. This is the second such suspension since the detention of Han and Zhang was announced last week. Shanghai Electric's shares stood at HK$2.55 (30 US cents) before the last suspension.

Hong Kong newspapers reported that Han was allegedly involved in misappropriating millions of yuan in employee benefits and pension funds in 2004. Han allegedly pocketed the money by making claims in the name of non-existent "laid-off workers."

Zhang has reportedly been under investigation since July 17 over the alleged illegal borrowing of 3.2 billion yuan (US$402 million) when he was in charge of Shanghai Fuxi Investment that holds an 8.15 percent stake in Shanghai Electric. Media reports said a local court had frozen Fuxi's assets.

Hong Kong-based analysts said the scandal would tarnish the company's image but they applauded the efforts of the mainland authorities to crack down on corruption and improve corporate governance.

Andes Cheng, associate director of South China Research, said the incident would inevitably harm investor confidence especially in Hong Kong. "It might be the tip of an iceberg," he said. "More and more scandals could be uncovered."

He believed the central government would step up its efforts to crack down on corporate embezzlement and fraud. "Although such a move would have an impact on the market it could improve the operation of mainland companies and boost overseas investors' long-term confidence," he said.

Terence Chong, a professor at the Chinese University of Hong Kong, said such a crackdown would send a positive signal to the market. "Mainland companies used to be known for their poor corporate governance and this incident points to the central government's determination to put this right," he said.

"However, mainland companies' corporate governance remains far from the international level," added Chong. "The mainland's accounting standards should ultimately reach global levels."

Analysts suggested investors not desert Shanghai Electric because they have more confidence in state-owned firms than private businesses.

"When a state-owned company goes bankrupt government shareholders will take the responsibility for bailing out minority shareholders, said Chong. "But if a private company goes under, minority shareholders may lose everything."

Fu Hung-man, dealing director of Polaris Securities, said the incident was not likely to dampen investors' enthusiasm for Shanghai Electric. "Investors are so irrational and myopic sometimes many of them even don't know who is the chairman of the company they've invested in."

(China Daily August 16, 2006)