HONG KONG — Perched on a steep hillside in Changshou township lies the modest family tomb of a military dynasty, overgrown with tall grass and lined with cheap white tiles.
Carved in an ancestral tablet that records the living as well as the dead is the name of Zhang Zhen, the family patriarch, who turns 100 next month and was one of the highest-ranking generals in the People’s Liberation Army. Below are his sons. One of them has the job of making sure the soldiers controlling China’s nuclear weapons stay loyal to the Communist Party. Another, Zhang Lianyang, was a general before venturing into business and is listed along with his wife, Chen Xiaoying.
The couple appears elsewhere together: on the corporate rolls of Citic 21CN, the telemarketing and pharmaceutical data business now controlled by the Chinese e-commerce giant Alibaba Group and Yunfeng Capital, a private equity company owned in part by Alibaba’s chairman, Jack Ma. Ms. Chen is Citic 21CN’s executive vice chairwoman, and Mr. Zhang was a director through April.
Alibaba has been one of the big success stories in China, a dominant private company in a country where state-owned enterprises typically command the heights of the economy. Its initial public offering, expected this week, could be the largest debut ever for an Internet company in the United States.
Alibaba’s acquisition of Citic 21CN, which was announced in January, provides an example of how the rapid growth of the private sector is also benefiting the country’s political elite, the so-called princelings, or relatives of high-ranking officials. Since Alibaba announced that it would buy a controlling stake in Citic 21CN for about $170 million, the pharmaceutical data company’s stock has risen more than sevenfold. As a result, Ms. Chen’s shares have soared in value by about $500 million.
That windfall has been previously reported. But the familial connections, traced to the stone tablet in Changshou, are largely unknown to the general public.
There is no evidence that Alibaba was aware of such connections. The company previously said it bought Citic 21CN for its “vast pool of pharmaceutical product data,” as part of an effort to build out technology standards for medical and health information. It was a “pure business decision,” according to a person with knowledge of the deal who was not authorized to talk publicly.
Although Alibaba declined to comment for this article, citing regulatory restrictions on public statements ahead of a public offering, the company has said it relies on the market — not political connections — to drive its business.
“To those outsiders who stress companies’ various ‘backgrounds,’ we didn’t have them before, we don’t have them now, and in the future we won’t need them!” the company said in a statement in July after a report that several investment companies tied to the sons and grandsons of senior Communist Party leaders owned stakes in Alibaba, including New Horizon Capital, whose founders include the son of former Prime Minister Wen Jiabao.
Ms. Chen did not respond to repeated requests for an interview made by fax, phone and visits to the company’s Hong Kong and Beijing offices.
Citic 21CN’s political ties run deep. Until April, its biggest shareholder was a sprawling state-owned conglomerate, the Citic Group, which employs many members of the political elite. Ms. Chen occupies the No. 2 spot at Citic 21CN.
Citic 21CN’s chairman until April was Wang Jun, formerly the chairman of the Citic Group. His father, also a general, was China’s vice president and pushed for the bloody 1989 crackdown in Tiananmen Square. As part of his work, Mr. Wang was awarded options, which he exercised in March to buy 30 million shares at a price below the market value.
Executives around the world forge ties with politically influential people, and there is not necessarily anything wrong with those connections. In China, top executives often run in the same circles as the political elite, and such relationships are often considered critical for securing licenses and deals.
But the ties, if not properly disclosed, can also prompt questions about a company’s transparency and operations. The enrichment of the political elite through share sales and takeovers has set off protests in China, where officials do not need to publicly detail their assets.
In the United States, law enforcement authorities are looking into whether JPMorgan Chase and other Wall Street banks that hired relatives of senior Chinese officials and top company executives violated the Foreign Corrupt Practices Act. JPMorgan and the other banks have not been accused of any wrongdoing.
Citic 21CN is part of a shopping spree by Alibaba. Over the past year, the e-commerce giant has spent more than $4 billion on acquisitions, including stakes in a Chinese soccer team, a ride-sharing company and a digital-mapping business.
The aggressive deal-making has raised questions about Alibaba’s strategy and whether it is properly vetting the companies. In March, Alibaba agreed to buy a film production company that it renamed the Alibaba Pictures Group. Alibaba recently said it had discovered suspicious accounting at the company.
Founded in 1998, Citic 21CN, which lists its address as on the 70th floor of one of Hong Kong’s most prestigious skyscrapers, makes money mainly from a call-center outsourcing service.
Alibaba said it was attracted to Citic 21CN’s pharmaceutical business notably because of its bar-code tracking system for drugs. Alibaba said in filings for its public offering that the Chinese government had asked Citic 21CN to track down doses of a vaccine that it feared were contaminated. According to the filing, the company’s technology was able to locate 200,000 doses of unused vaccine within a day. Citic 21CN’s technology, data and relationship with the medical community could be used to reduce the amount of counterfeit drugs in China, according to the person with knowledge of the deal.
The deal, the person said, builds on an existing relationship between the companies; Citic 21CN was paying Alibaba for technical support. Alibaba’s rival Tencent Holdings this month bought into DXY.cn, a company that also focuses on health care information. Citic 21CN, which does not have a working website, has not made a profit since 2006, with administrative expenses like rent eroding earnings. The pharmaceutical division is also relatively small, with just $7.4 million in revenue in the year ending March 31.
“Prior to Alibaba’s investment in Citic 21, the business appears to have been small, unprofitable and without incredibly exciting growth prospects,” said Jeff Dorr, an analyst for J Capital Research in Hong Kong.
The company depends heavily on the government and state-owned companies for its revenue. Last year, three-quarters of its sales were linked to government-related entities. The company notes its close ties to China’s Food and Drug Administration in reports.
Little is known about Ms. Chen and when she married into the Zhang family. By her mid-20s, when most young people are just getting a start, she was an established business executive in Hong Kong, investing in Chinese infrastructure projects.
A native of Liaoning Province in northeastern China, she set up a Hong Kong investment company in July 1989, at 26, after studying in Japan, according to company filings and online biographies. In 1998, she won a prestigious spot on the advisory body to China’s national legislature. Her investment company, the Pollon Group, bought stakes in electric power plants in Liaoning. She is a past director of China Resources Power, which paid hundreds of millions of dollars for some of her power company assets in 2007.
Days before Alibaba’s deal for Citic 21CN was announced and her net worth skyrocketed, Ms. Chen signed a contract to buy a luxury home with a rooftop swimming pool on Victoria Peak in Hong Kong for $68.4 million, according to Hong Kong land records. Even by Hong Kong’s standards, it was pricey, ranking in the territory’s top 10 residential real estate transactions ever.
Back in Changshou, in Mao Zedong’s home province, Hunan, relatives who live near the tomb hold the Zhang family in high regard. They say they have never seen Ms. Chen there, and her name was carved into the stone tablet much later than the others. She replaced General Zhang’s first wife, whom he divorced, they said, adding that they did not want to be identified because they did not want to cause trouble with the family.
They have seen General Zhang and his younger brother Zhang Haiyang, political commissar for China’s nuclear forces, on annual visits to pay respects to their ancestors. “We call them ‘chief’ when they come back home. They are all ‘chiefs,’ ” said one relative.