“White Glove” Sisters at Center of Coal Country Graft Scandal

Two sisters with business savvy and important friends in high places are now the standout figures in the mysterious case of a former Shanxi province government official, Jin Daoming, charged with corruption.

Few details of the Jin case have emerged since he was suddenly kicked out of the provincial branch of the National People's Congress in March. His Beijing bosses with the Party's Central Discipline Inspection Commission said on February 27 he was charged with "serious violation of 'party discipline,'" a euphemism for corruption.

Jin, 61, was the former chief of the provincial Communist Party's anti-corruption agency. A Beijing native, he had moved to Shanxi in 2006.

The sisters from the central Shanxi city of Jinzhong—Hu Xin and her younger sister Hu Lei—built a business empire that may have helped Jin launder money and hide illegal activity before authorities caught on to the scheme, according to sources and official records obtained by Caixin.

The Hu sisters were apparently Jin's "white gloves," which means they ran businesses created expressly to cover up official corruption that looked white-glove clean. The white gloves tactic is a favorite among unscrupulous government officials in China for whom direct involvement in commercial activity is illegal.

The sisters, together with their father Hu Xiangrui and mother Xiao Guihua, who all now live in the capital city Taiyuan, owned and operated at least seven companies between 2002 and 2012 that apparently profited from special government connections.

Sources told Caixin several of these companies formed shady relationships with provincial government agencies and state-owned enterprises.

The sisters reportedly met Jin in 2008. That same year, they expanded their business interests into real estate, coal mining, and information technology, winning major government contracts.

Apparently, some of these companies pursued government contracts far beyond their fields of expertise. Large land parcels were bought and sold to state companies, allegedly helping the Hu sisters pocket healthy profits.

Without special help—the kind that only high-level government officials can provide—the sisters likely would have never won these contracts.

Getting to Know You

Jin got to know the Hu sisters during a stormy period for the coal industry in Shanxi, and the parts they played apparently solidified their relationships.

It was 2008, and Jin's agency with the provincial government had launched a huge campaign to weed out graft. The effort brought down nearly 9,000 Party officials before it ended in 2013. Seized were more than 30 million yuan ($48 million) in illegal gains—an amount equal to nearly one-third of the Shanxi government's annual budget.

While the battle against graft was getting under way, the Hu family's first business—Shanxi Aoke Xinde Technology & Trade—was taking off thanks to lucrative government contracts. Registered in 2003 under Hu Xiangrui's name, the company's main businesses involved software development, computer engineering, surveillance equipment, and security systems that use smart cards.

Earlier, Aoke Xinde had been honored with a government award for innovation and Hu Xin was personally recognized as an innovative software engineer in 2007.

Each of the Hu sisters had earned an engineering degree, and their father had worked as an assistant engineer after receiving a technical school education.

Aoke Xinde did not have the technical qualifications to handle some contracts, based on company documents. It could rightly bid for electrical engineering projects that required the minimum level of expertise, but not for a digital city management job it won in 2009.

That one-year contract from the Taiyuan government was worth 40.6 million yuan ($6.5 million). The Shanxi government requires its contractors obtain the highest qualification level before winning any electrical engineering project worth more than 25 million yuan ($4 million), or that involve sensitive government operations such as security.

Aoke Xinde also won a similar one-year contract from the city of Datong to develop and install information systems for local government departments. The deal was worth 27.5 million yuan ($4.4 million).

Among the company's other government contracts were projects to integrate police, ambulance service, and fire department alarm systems, and a surveillance system for local coal mines linked to the public security bureau.

The business started branching out in 2008, dipping into the real estate and coal mining sectors. With help from their father, the Hu sisters set up four new companies in 2009, including an investment firm, two real estate agencies, and an information technology company.

The father opened the investment firm—Beijing Xinde Yuansheng Investment Co. Ltd.—with 21 million yuan ($3.4 million) in registered capital. Two months later, he bought Shanxi Kaicheng Real Estate Development Co. Ltd.

Another real estate company, Shanxi Boyi Real Estate Development Co. Ltd., was then launched and registered using Kaicheng's office address and listing the Hu sisters' mother as Chairman and General Manager.

The Hu family ran Kaicheng and Boyi for less than a year before selling the businesses to state companies.

Shanxi Lanhua Coal Mining Group Co. Ltd., a state-owned concern listed on the Shanghai Stock Exchange, bought Boyi for 200 million yuan ($32 million). But the deal apparently was never properly recorded in the government's official business database, according to a check of government files. The transaction came to light later, though, in a Lanhua business audit.

Boyi's assets included 11.6 hectares near Taiyuan's airport, which it bought for 150 million yuan ($24 million). Apartments were later built on the land.

A similar deal involving Kaicheng came a year later, when the company paid about 110 million yuan ($17.6 million) for a 15.6-hectare commercial parcel in Taiyuan, according to a city agency.

In 2011, though, the government agreed to swap Kaicheng's parcel for a much more expensive plot zoned for high-end homes because it wanted to preserve the ancient ruins from the Ming and Qing dynasties found in the 15.6-hectare plot Kaicheng bought earlier. Six months later, the Hu family sold Kaicheng to a subsidiary of state-owned China Railway Tielong Container Logistics Co. Ltd. for 300 million yuan ($48 million).

The sisters' coal mine investments were also lucrative. In 2010, Xinde Yuansheng bought 20 percent of the Yuxi Coal Mine, a subsidiary of Shanxi Lanhua Sci-Tech Venture Co. Ltd., for 86.9 million yuan ($14 million)—apparently a real steal since the mine was worth more than 1 billion yuan ($160 million), according to Lanhua's 2013 annual report.

Hu Lei's company—Shanxi Aoke Xinde Information Technology Co. Ltd.—collaborated with Lanhua on a "digital coal mine" project for a government customer in 2009. The goal was to develop an information system that would store and monitor coal mine data, simulate production processes, and control risks.

Lanhua invested 498 million yuan ($80 million) in Aoke Xinke between 2010 and 2012, according to business records, originally for the coal mine information system. But the money later went into a commercial office building development.

The companies worked together to build the Jiaming International office buildings in Taiyuan. One building is owned by Lanhua's parent Lanhua Group. Aoke Xinde borrowed 500 million yuan ($80 million) from Lanhua Group for its part of the project and then sold out for 750 million yuan ($120 million), China Business Journal reported.

All in the Family

Hu Lei, born in 1979, was an original shareholder of Shanxi Aoke Xinde Culture Communication Co. Ltd., a company that opened in Taiyuan in 2004 and was registered under the name of her sister, Hu Xin, who was born in 1977.

Hu Lei was listed as the legal representative for Aoke Xinde. Her name also appears alongside her sister's and father's names in a construction project's documentation.

The father worked as a telegram station director under the China Railway No. 3 Engineering Group before becoming a business owner in 2002. First, he launched Beijing Aoke Xinde Technology & Trade Co. Ltd. with 500,000 yuan ($80,000) in registered capital. He dissolved that company a year later and set up Shanxi Aoke Xinde.

A source familiar with the family said one of Hu's two daughters—apparently Hu Xin—went to a university in the eastern city of Nanjing. She graduated in 1997 with a degree in information engineering from Nanjing Tech University, records obtained by Caixin show. She worked at Shanxi Jinzhong Bode Technology & Trade Co. Ltd. for six years before joining her father's Shanxi company in 2003.

A former colleague of the father called his daughters clever and articulate, like their mother. But ever since authorities announced that Jin had been placed under investigation and had been sacked, rumors about the family have been spreading in their native Jinzhong. The Hu sisters, who have not been accused of wrongdoing, are now the talk of the town.

The family's neighborhood in the city's Yuci district used to be a factory area under China Railway No. 3 Engineering Group, where the father and mother worked.

Later, the family moved to Taiyuan but held on to their Jinzhong apartment. The mother used to occasionally return to care for their old home, the source said, but since late last year, "I haven't seen her."