Six senior executives of the well-known Chinese refrigerator maker Kelon were detained Monday by the public security bureau of Foshan City, Guangdong Province.

At the same time, trading of Kelon stocks was suspended at the Shenzhen Stock Exchange.

The six, who are suspected for "economic crime," were Kelon board chairman Gu Chujun, vice chief executive Yan Yousong, financial superintendent Jiang Baojun, vice chief financial official Yan Guoru, financial resource department vice director Liu Ke and Zhang Xihan, a senior of Shenzhen Greencool Co. Ltd., the largest shareholder of Kelon, said the source with Foshan public security bureau.

The China Securities Regulatory Commission started to probe Kelon in May, and ended the investigation July 20, although the result has not been made public.

A 60-million-yuan (US$7.4 million) deficit in the Kelon 2004 annual report, contrasting blatantly with the 200 million yuan in profit in the first three quarters, had caught public attention.

Kelon affair weighs on State asset reform

After a weekend of second-guessing in the media, it was confirmed late on Monday that six senior figures at Guangdong Kelon Electrical Holding Co, a large domestic refrigerator maker, have been detained.

Gu Chujun, the controversial board chairman, is alleged to have committed an economic crime, as are the other five.

Early media reports said the authorities were investigating Gu's alleged use of millions of yuan of Kelon's cash to pay for the acquisition of three companies -- Meiling Electrical Appliance, Yaxing Bus and Xiangfan Bearing.

The China Securities Regulatory Commission (CSRC) started to probe Kelon in May, and ended its investigation on July 20 without making the outcome known.

The arrest of the six marks a dramatic end to last year's eye-catching argument between Gu and Lang Xianping over the drain on State assets in the process of the reform of State-owned enterprises.

Lang, a Hong Kong professor, has shed light on this long-term problem by demonstrating the huge losses of State-owned assets based on accounting and other data from well-known companies including Greencool Technology, chaired by Gu. Later Gu responded with a defamation suit filed against Lang in Hong Kong.

Now, with one of the debate's protagonists detained in the midst of a corporate scandal, the exchange of criticism has come to an abrupt stop.

While Kelon struggles to deal with the repercussions, the search for the epicentre of the scandal should not focus only on the refrigerator maker.

Both the supervisor of State assets and the domestic stock market watchdog should investigate the underlying problems the Kelon case has exposed.

The State-owned Assets Supervision and Administration Commission is responsible for overseeing and ensuring the appreciation of the country's assets, worth trillions of yuan and tied to hundreds of thousands of State-owned enterprises.

While trying to focus mainly on about 100 large-cap enterprises that account for the majority of State-owned assets, the commission must quickly come up with a set of policies to standardize reform of small and medium-sized firms.

As the country deepens reform of State-owned enterprises to meet the rising challenge of market competition, clear-cut rules guiding ownership reform are crucial to the transformation of loss-making State firms into competitive market players.

In the absence of effective supervision, some potential investors hesitate to participate, and others may try to use regulatory loopholes to seek personal gain at the cost of the State. The first group's inaction will hinder efforts to raise the overall efficiency of the economy, and the latter group clearly hamper reform.

The CSRC should take the Kelon scandal's implications on board. There has been concern that some majority shareholders are abusing their control of listed companies against the interests of public investors.

The market watchdog is going all out to push through inevitable reforms to end the split-share structure. A large number of non-tradable shares held by State and legal entities must be allowed to float by compensating public investors, if the stock market is to optimize capital distribution.

Share merger reform is just one of the prerequisites for the stock market to begin to work its magic.

The Kelon case is a wake-up call. Aggressive and effective supervision of listed companies is urgently needed.

(Xinhua News Agency via Shenzhen Daily, China Daily August 3, 2005)