The Secretive China Energy Giant That Faces Scrutiny: QuickTake

(Bloomberg) -- CEFC China Energy Co.’s rapid ascent was shrouded in mystery and speculation swirled that the company and its chairman, Ye Jianming, were connected to China’s military. The Chinese conglomerate’s deals, debt and management are now coming under increasing scrutiny. There are signs that CEFC is struggling to repay borrowings and reports that Ye has been investigated by authorities and stepped down from management of the company, which has been taken over by an arm of the Shanghai government.

1. What is CEFC?

When it agreed to buy a $9 billion stake in Russia’s Rosneft PJSC in September, CEFC said it was China’s largest private oil and gas company, with 50,000 employees and revenue of more than $40 billion. Since its founding in 2002, it has bought up stakes in sectors ranging from oil and petrochemical processing to financial services, apparel and even a soccer team in the Czech Republic. Its oil-trading portfolio includes a 4 percent stake in Abu Dhabi’s largest oil concession, awarded last year for an $888 million signing bonus, and a five-year supply deal with Rosneft.

2. How did CEFC win the Rosneft deal?

It agreed to purchase the 14.16 percent stake from a joint venture of Glencore Plc and Qatar Investment Authority, which had acquired their shares only about nine months earlier. The acquisition is to be funded by a loan from Russia’s VTB Bank PJSC. CEFC was an unorthodox buyer. In the past, China has relied on state-owned China National Petroleum Corp. China Petrochemical Corp., known as Sinopec, or Cnooc Ltd. to buy overseas assets.

3. What suggests CEFC may be tied to China’s military?

Singapore-listed AnAn International Ltd. said in its 2012 annual report, when it was still called CEFC International Ltd., that Ye worked from 2003 to 2005 as deputy secretary-general of "CAIFC," the acronym for China Association for International Friendly Contact. That group is a political arm of the People’s Liberation Army, according to a 2013 report by the Project 2049 Institute, an Arlington, Virginia-based researcher that focuses on Asia security issues. In a 2016 interview with Fortune magazine, Ye said he declined an invitation to become a director at that association, and he denied any ties to the military. The CAIFC reference is missing from subsequent annual reports.

4. Is there anything else?

Ye at one point was a business partner with Ye Jingzi, the granddaughter of Marshal Ye Jianying, one of the founders of China’s military and a senior state leader until the early 1980s. (The two, along with three other CEFC executive directors -- Li Yong, Chen Qiutu, also known as Chan Chauto, and Zang Jianjun -- were owners of a company called Carrier Capital (Hong Kong), which invested in a Hong Kong film distributor in 2015.) Sharing the Ye family name and partnership with the marshal’s granddaughter also sparked speculation that the CEFC chairman was related to China’s political elite. Ye Jianming has denied a family relationship as long ago as 2002, Chinese media outlet Caixin reported in a profile story. Bloomberg hasn’t found evidence they’re direct relatives.

5. Does CEFC have any official link to the government?

It doesn’t appear so, though the company has made efforts to align itself with the ruling Communist Party and the government’s priorities. Beyond having party committees inside the company, like other state-owned enterprises, Ye has attributed 70 percent of the success of the Rosneft deal to President Xi Jinping’s “Belt and Road” initiative, his signature foreign investment policy. And many of CEFC’s acquisitions, such as deals in the Czech Republic and Kazakhstan, came around the same time as high-profile visits by government officials, leading to speculation that there’s some sort of connection, according to Li Li, a research director with ICIS China, a commodities-focused research company.

6. Why is CEFC under scrutiny now?

There’s no clear answer. The company finds itself in trouble as Xi’s government cracks down on the nation’s rising tycoons and their acquisitive companies, including Anbang Insurance Group Co. and HNA Group Co., amid a drive to cut debt and capital outflows. CEFC appeared to be in safe territory last year as regulators, which were seeking to rein in many types of outbound deals, encouraged acquisitions in strategic industries like oil and mining. The company might have been using its energy assets as collateral for loans and to facilitate transactions, raising concern among regulators, according to Laban Yu, a Hong Kong-based analyst at Jefferies Group LLC. “CEFC looks more like a financing scheme, and the energy assets were simply used as a tool to get bank loans,” Yu said. (CEFC has declined to comment on its financing.)

7. What about in the U.S.?

Federal prosecutors there have accused Patrick Ho Chi-Ping, Hong Kong’s former home secretary, of involvement in a bribery scheme to offer the president of Chad $2 million for oil exploration rights, as well as a separate plan to offer $500,000 to the foreign minister of Uganda, to win business for a Chinese energy company that matches CEFC’s description. “Until now it seemed that CEFC was quite closely aligned with Xi himself,” Andrew Chubb, a fellow at the Princeton-Harvard China and the World Program, said by email. “If so, the arrest in New York of Ye’s associate, Patrick Ho, late last year for bribery might have contributed to changing Xi’s views.” (Ho has pleaded not guilty. CEFC said in a statement that it “conducts its business activities in strict accordance with the law, and it operates under sound business management.”)

8. How much debt does CEFC carry?

Details are difficult to gather, given its multiple subsidiaries in oil trading and finance. According to a prospectus for a domestic bond, CEFC China Energy had a debt ratio of almost 77 percent at the end of 2016, compared with 62 percent in 2014. One unit, CEFC Shanghai International Group, has total liabilities of 127.9 billion yuan ($20 billion) as of Sept. 30, according to the latest unaudited financial report. The conglomerate must repay at least 11.8 billion yuan of notes during the rest of 2018, according to data compiled by Bloomberg. A creditor committee has been formed and CEFC’s global property portfolio, with a book value of 20 billion yuan, as well as at least one brokerage unit, is being put up for sale. The company said in March that it’s “actively taking measures” to maintain operating stability.

9. So who owns CEFC?

It doesn’t appear to be Ye Jianming. AnAn International said March 1 that Ye no longer has any interest in the company, citing a 2015 announcement, and he isn’t among owners listed in an August 2016 bond prospectus of one of CEFC’s units. That document, as well as a recent search of the country’s Administration for Industry & Commerce, show that executives Li and Zhang -- along with Su Weizhong, Zheng Xiongbin and Zhuang Miaozhong -- have indirect stakes in CEFC China through holding companies.

The Reference Shelf

• Rising energy star investigated.
• Ye Jianming riffs on $30 oil and Rosneft.
• Xi’s warning to billionaires.
• Bloomberg Gadfly’s Nisha Gopalan sees echoes of Anbang.

--With assistance from Jonathan Browning Alfred Cang Keith Zhai Tom Wilson Alan Katz Stephen Stapczynski Blake Schmidt Judy Chen Heng Xie Steven Yang and Emma Dong

To contact Bloomberg News staff for this story: Simon Lee in London at slee936@bloomberg.net.

To contact the editors responsible for this story: Ramsey Al-Rikabi at ralrikabi@bloomberg.net, Laurence Arnold, Grant Clark

©2018 Bloomberg L.P.

With assistance from Simon Lee