The mysterious rise and apparent fall of China's largest private oil company have raised a host of questions for the government and relations with Russia, analysts say.
Questions have been swirling around the investment empire of CEFC China Energy Company Ltd. since March 1 when Caixin magazine reported that its founder and chairman Ye Jianming had been "placed under investigation."
The 40-year-old billionaire was "detained for questioning," the South China Morning Post said the same day.
The company issued a statement calling the reports "irresponsible," "unverified" and lacking in "factual basis."
CEFC was "operating normally," the company said.
But last week, The New York Times reported that several senior executives have been barred from leaving the country, citing an anonymous "person briefed on the company's situation."
Signs of trouble have continued to pile up for the mysterious conglomerate that burst into prominence in September with an agreement to buy a major stake in Russia's state-owned Rosneft oil company.
Recent reports have left the U.S. $9.1-billion (57.5- billion yuan) deal for 14.16 percent of Rosneft shares up in the air.
On March 2, the Post reported that Shanghai Guosheng Group, an investment agency of the municipal government, had taken control of the management and daily operations of CEFC.
Shares and bonds of the company's affiliates and investment holdings have suffered steep drops.
Numerous reports linked the moves against CEFC to the government's abrupt takeover of another fast-growing investment powerhouse, Anbang Insurance Group, on Feb. 22.
That intervention was explained as part of the government's drive to reduce financial risks in the economy.
"Illegal business practices by Anbang Insurance Group may seriously threaten the solvency of the company," the China Insurance Regulatory Commission (CIRC) said in a statement, adding that the company's chairman Wu Xiaohui had been prosecuted for "economic crimes."
The government previously warned Anbang and other insurers against "illegal shifting of onshore assets to overseas markets" and foreign borrowing to finance mergers and acquisitions.
Over the past three years, Anbang had indulged a voracious appetite for foreign investment, including the U.S. $2- billion (12.6-billion yuan) acquisition of New York's Waldorf Astoria Hotel.
On March 4, Reuters quoted a top economic official as calling for stronger regulation of investment in a report citing the Anbang and CEFC cases as examples.
"Furthermore, there should be stronger oversight rather than the relaxation of financial oversight," said Yang Weimin, deputy director of the Office of the Central Leading Group on Financial and Economic Affairs, the Securities Times reported.
‘Convenient storyline’
But while CEFC followed a similarly aggressive growth path, it is unclear that it belongs in the same category with Anbang, HNA Group Company Ltd. and other high-flying investment headliners that have gorged on assets abroad.
Edward Chow, senior fellow for energy and national security at the Center for Strategic and International Studies in Washington, criticized the reports connecting the CEFC takeover with those of other conglomerates, calling it "a convenient storyline for Beijing."
Before the Rosneft deal, few in the oil business had ever heard of the privately-held group based in Shanghai, although it has been branching out into fields including energy and investment banking since its founding in 2002.
The agreement to acquire Rosneft shares held by Swiss- based trader Glencore plc and the Qatar Investment Authority cast a spotlight on CEFC and a wave of recent deals.
With wide-ranging investments in oil, infrastructure, banking, financial services, travel and hotels from Asia to Europe, the Middle East and Africa, CEFC has expanded its influence at home and abroad.
The company's holdings included oil rights in the United Arab Emirates, a majority stake in Kazakhstan's international holdings of gas stations in Romania, an insurance company in Portugal, and host of assets in the Czech Republic including a brewing company, a media group, a soccer club and hotels.
But the Rosneft deal was the largest and most influential, giving CEFC access to 60.8 million tons of Russian crude per year (244,000 barrels per day) through 2022, as well as strategic cooperation in exploration and production, refining and petrochemicals, oil trading, sales and financial services.
All this appeared to have the blessings of the Chinese government despite a series of warnings to investment groups against overpriced overseas acquisitions, particularly in non-core sectors such as real estate, entertainment, sports clubs and hotels. Analysts say the restrictions amount to new capital controls.
CEFC was thought to be immune to the warnings, thanks to Ye's perceived status as a political "princeling," based on rumors that he is a grandson of the late Communist Party leader and Long March hero Marshal Ye Jianying. The relationship has never been confirmed.
Unlike Anbang and other investment groups, CEFC in its bid for Rosneft shares also appeared to be following the goals of China's two-decade-old "go out" policy aimed at securing oil assets abroad.
Before the reported investigation, misgivings over the deal focused on doubts about financing and questions about why the deal was not made with Rosneft's main Chinese customer, state-owned China National Petroleum Corp. (CNPC) or China Petroleum & Chemical Corp. (Sinopec), which is also state-owned.
Offers of financing came from Russian state lender VTB Bank rather than CEFC's usual backer, China Development Bank (CDB), raising further questions. Why would a Russian state- owned bank finance the sale of shares in a Russian state- owned oil company to a Chinese buyer? The answer remains unclear.
Earlier this month, CDB president Zheng Zhijie told Reuters that CEFC never approached the bank on financing the acquisition.
The sale was reportedly driven by financial pressures on Glencore, which acquired its Rosneft shares in 2016 as part of a partial privatization to raise cash for the Russian government.
But Glencore's expected date for closing the sale to CEFC in mid-December came and went. Last month, Glencore revised the date to sometime in the first half of this year.
Bribery charges
In the meantime, trouble for CEFC erupted in November with the arrest in New York of Patrick Ho Chi-ping, a former Hong Kong home affairs secretary and head of the CEFC-affiliated China Energy Fund Committee, together with Cheikh Gadio, a former foreign minister of Senegal.
The two men were charged with offering U.S. $2.5-million (15.8 million yuan) in bribes to officials in Chad and Uganda to acquire "valuable oil rights" for a company identified in press reports as CEFC.
Ho has pleaded not guilty, while Gadio did not initially enter a plea.
In a statement reported by Reuters, CEFC denied any involvement of its Hong Kong-based NGO in the company's commercial activities. But the charges have been seen as a black eye for China's Belt and Road initiative, aimed at building trade routes and infrastructure from Asia to Africa, Europe and the Middle East.
"I want to emphasize that the Chinese government consistently requires Chinese companies abroad to operate lawfully and abide by local laws and regulations," said Chinese Foreign Ministry spokesman Lu Kang following the arrests.
No connection between the case of the bungled bribery and the delay in the CEFC-Rosneft deal has been proven, but it has been suspected.
"I have to believe that CEFC had implicit approval to go after Rosneft's shares after CNPC and Sinopec decided against it," said Chow. "Then they turned out to be incompetent, which is a bigger crime in China than being corrupt."
The reported takeover of CEFC one day before the start of China's annual legislative sessions also suggests a political dimension, with perhaps a warning of investment or corruption crackdowns to come.
In another addition to the CEFC mystery, the Financial Times and Reuters have reported that state-controlled China Huarong Asset Management Co. has bought a 36.2-percent stake in the CEFC subsidiary seeking to acquire the Rosneft shares.
The sale has effectively recapitalized the unit, CEFC Hainan International, with an increase of U.S. $1.52 billion (9.6 billion yuan), Russia's daily Kommersant said.
What happens now to the Rosneft shares and oil supply deals is anybody's guess.
"It (the investigation of CEFC's chairman) is not related to us," Rosneft spokesman Mikhail Leontyev told Reuters on March 1. "It would be stupid to comment on this information," he said.