China’s CEFC Crash has Growing Implications for China Leadership

The saga of a high-flying energy conglomerate that is said to have been China’s biggest private concern is playing out in a US federal court in New York, where Patrick Ho, a onetime Hong Kong home affairs minister and socialite, is on trial on allegations of bribing officials in Chad and Uganda.

The company is CEFC China Energy, which was closely tied to the Communist Party and the People’s Liberation Army until the allegations of bribery surfaced. The company is majority owned by Shanghai Energy Fund Investment Ltd (SEFI) headed by Ye Jianming, also the chairman of CEFC. With annual revenues topping the equivalent of US$40 billion, the company in a wide range of sectors besides oil and gas including transport infrastructure, and logistics services with most of its assets in overseas markets. Its specialty is oil trading and the purchase of overseas energy assets.

Apparently at the orders of President Xi Jinping, the China Development Bank abruptly pulled its lines of credit on offshore bonds for CEFC, leaving Hong Kong and other investors on the hook for billions of dollars. “Xi got really upset. It looked like Ye was trying to milk his political connections, Xi got pissed off,” a Hong Kong-based source said.

Ye was arrested late last year and hasn’t been seen since, a huge black eye for Xi, partly because of the willingness to allow a private enterprise company to do huge deals across the planet, partly because corruption is starting to surface in China’s vaunted Belt and Road initiative to spread infrastructure construction across the planet, and partly because it is an indication of how hard it is to stamp out corruption despite Xi’s six-year-old anti-corruption campaign, which started in 2012 and which so far has seen the imprisonment of more than 100,000 offenders, most of them Chinese bureaucrats. The gossip in China is that CEFC is closely tied to the so-called Shanghai Clique headed by former leader Jiang Zemin, which forms the underground resistance to Xi Jinping.

Behind the bribery trial is a ‘huge case,” said a Hong Kong-based economist with lines into to the mainland government. “This is the biggest private enterprise in Shanghai. The way it operated is an indication that it had ties to people high up in the party and the government. A lot of their counterparties are state-owned enterprise subsidiaries. It is a huge blow to the whole system, people don’t realize it. They are trying to cover it up.”

Today, billions of dollars’ worth of CEFC’s deals have collapsed, he said, including a US$9.1 billion acquisition of a stake in Rosneft, the Russian energy giant, which stopped when Ye was arrested. At least one CEFC subsidiary has been wound up, with more to come.

Parts of the company have been seized by the government and state-owned enterprises. Overseas bondholders have been hit hard already by long list of defaults in China. Huachen Energy Co. in November, for instance, failed payment on its 2020 US$500 million bond, although it has promised payment by the middle of this month. So far, Chinese bond issuers are delinquent on a record RMB101 billion (US$14.52 billions), according to Bloomberg.

CEFC “has a huge amount of bank lines, which has led to a crash, liquidity has dried up when China Development Bank pulled the lines. Nobody could survive,” said an economist for a Hong Kong-based investment bank. “CBD is going to pay off itself. This is a shock to the onshore rating system. As much as RMB20 to 30 billion of RMB bonds have defaulted.”

As Bloomberg noted, another test relates to China Energy Reserve & Chemicals Group Co., a major defaulter that said in October it had failed to follow regulations regarding two US dollar bonds. Unlike Huachen, these weren’t sold directly, but the parent company guaranteed them. While such guarantees should be registered with the State Administration of Foreign Exchange, China Energy hadn’t done so.

Ho, a musician and eye doctor who held multiple positions in the city’s government before associating himself with CEFC, is alleged to have paid bribes to African leaders in the company’s campaign to further the interests of the increasingly controversial Belt and Road Initiative. The charges are just the latest blow to the BRI, which is increasingly regarded by officials across the world as a kind of poisoned chalice. Sri Lanka and Pakistan, for instance, are attempting to cope with swingeing debt repayments for infrastructure projects that have ballooned out of control.

Malaysia’s reform government, headed by retreaded prime minister Mahathir Mohamad, has stepped away from extensive rail and other projects contracted for by Mahathir’s predecessor, Najib Razak. In Indonesia, a high-speed railway between Jakarta and Bandung, wrested away from Japanese interests by China, is stalled because of land acquisition problems.

In Europe, EU ambassadors in April released a report challenging the BRI, saying it “runs counter to the EU agenda for liberalizing trade and pushes the balance of power in favor of subsidized Chinese companies.” Charges of exploitation are rife across Africa as Chinese companies win enormously expensive infrastructure contracts, bring in Chinese workers to build the projects and leave countries with massive debts.

Across the world, from the Philippines to Africa, there is growing alarm over corruption. Ho and CEFC are the most potent example of the problem, with executives becoming economic advisors to countries where it acquired assets.

In Chad, according to western media, Ho is alleged to have offered US$2 million for oil rights for CEHC in a supposed “charitable donation.” Ho apparently paid US$400,000 before the deal was stopped. He is also alleged to have paid US $500,000 to Uganda’s foreign minister, who supposedly was helping CEFC to buy a local bank.