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Dairy Producer Confirms Scandal

Three senior executives at Yili Corp, one of China's biggest dairy groups, have been detained, the company confirmed on Tuesday.

"We received formal notice from the police that three senior officials have been detained," said a spokesperson from the dairy company, based in Inner Mongolia Autonomous Region.

He identified the officials as Zheng Junhuai, Yili's chairman; Zhang Xianzhu, its board secretary and chief financial officer and Li Yongping, head of Yili's securities department. However, he refused to provide reasons for their detention.

Reports on Monday said that up to seven Yili executives had been detained on suspicion of embezzlement and other economic crimes late last week. The spokesperson declined to comment on this.

Yili is set to hold an emergency meeting on the case and talk about management arrangements, he said. Company operations will not be affected as Vice Chairman Yang Gui has temporarily replaced Zheng and all departments are running normally, he added. "We have not seen signs that sales have been impacted."

Yili's shares were suspended from trading on the Shanghai Stock Exchange on Monday shortly after opening, once they started to fall by the daily limit of 10 percent. The suspension continued yesterday pending an announcement by the company. Yili shares last traded at 9.77 yuan (US$1.18).

Reports said the government of Hohhot, the Inner Mongolian capital, where the company is based, sent a senior official to the company. But the spokesperson did not confirm the visit.

Yili Group is one of 520 key industrial enterprises and one of the 151 leading industrial enterprises in the country's agricultural sector. It produces 39 products including milk, yogurt, milk powder, and ice cream. The group went public in 1996. Yili has registered sales of 10 billion yuan (US$1.2 billion) so far this year, compared to 6.3 billion yuan (US$761 million) in 2003.

Reports said prosecutors began investigating accounts at Yili following announcements last summer that the company had lost millions of yuan in bond dealings.

Yili received a notice from a securities regulator in July of an investigation into alleged securities irregularities. Heavy losses in bond investments also triggered a crisis that led to an independent director's resignation in August.

Analysts believe the Yili case will have some impact on the market, though the Composite Index remained calm yesterday after losing more than 1 percent on Monday.

Zhu Weihua, an analyst from Merchant Securities said Yili, regarded as a blue-chip stock, is heavily invested in by institutional investors including securities investment funds.

"As a result, the Yili scandal will have a substantial psychological impact on stock investors, as some investors may doubt the performance of other blue-chip companies," she said.

However, she said she believes Yili will not suffer from the scandal for long after a management reshuffle since it has displayed good business performance. According to financial data released by the group, it has far outperformed the industry average and other listed Chinese dairy producers.

It was also announced in Guangdong yesterday that a celebrated businessman, a state-level May 1 Labor Medal winner, was charged with bribery and misuse of public funds after allegedly embezzling 2.16 billion yuan (US$261 million). Chen Yongqing is a former chairman of the board of Shenzhen Petrochemical Industrial Group.

(China Daily December 22, 2004)

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