BEIJING (Interfax-China) -- The government of Jingzhou in Hubei Province has now seized control of a private oil company after the detention of its manager amid allegations of corruption, a local government official confirmed this week.
The State-owned Assets Supervision and Administration Commission of Jingzhou has taken over Tianfa Group, formerly owned and run by Gong Jialong, also chairman of private oil firm Great United Petroleum Co Ltd, and a leading figure in China's burgeoning private oil sector.
The city government will launch a debt restructuring and negotiate a debt purchase by Lehman Brothers [NYSE:LEH], according to sources.
At the end of May, the Tianfa Group owed a total of 2.9 billion yuan ($371.9 million) to nine banks, including the Hubei provincial branch of Bank of China, the Jingzhou branch of the Agricultural Bank of China as well as the Jingzhou branch of China Construction Ban.
The report said part of the debt owed to banks is likely to be sold to Lehman Brothers at a sharply discounted price and domestic financial asset management firms may also take on some of the debt. It gave no details.
Gong was detained by local police two weeks ago, an official from the Department of Propaganda at the Jingzhou Committee of the Chinese Communist Party told Interfax.
At the time of his detention, Gong was also chairman of the China Chamber of Commerce of Petroleum Industry.
The police did not reveal any specific charges against Gong, but said that he had been detained on charges of economic crimes, a very broadly defined term that does not specify whether it is misuse of funds, bribery or the use of falsified documents, according to the China Securities Journal.
The police also could not reveal whether Gong had officially been arrested, the report said.
The incident has put the murkiness of Chinese company law, and the status of private enterprises in an economy still dominated by the state, under renewed scrutiny.
It is clear that Gong's detention is disastrous for two listed companies involved, the Tianfa Petroleum Co. [SZA:000670] and the Tianyi Science and Technology Co. [SZA:000908], which were both controlled by the Tianfa Group.
The two companies were suspended from trading because of the sharp decline in their share prices after Gong was detained late last month.
The Tianfa Group has been in deep trouble since 2001. According to the company's 2004 report, the company's total liabilities reached RMB 2.775 billion ($355.76 million) by the end of that year, and current liabilities stand at RMB 2.079 billion ($266.53 million). Its long-term liabilities have reached RMB 696 million ($89.23 million).
Legal ambiguities mean that the identity of the legal owner of the two listed companies remains unclear, and Tianfa Group's status as a privately-owned company is also in doubt.
Back in 1988, Gong founded a home supplies trading company in Jingzhou, Hubei Province. The company was established at an opportune time with inflation-fearing people eager to buy and stockpile anything they could get hold of. The company was so successful that Gong made millions in just two years. The trading company was the precursor of Tianfa Group.
In 1989, Gong decided to start an oil trading company, and purchased two oil and LNG tanks to found the Jingzhou Depot of the Longhai Oil and LNG Company, which later became the Tianfa Petroleum Company.
In the late 1980s, Chinese corporate law stipulated that private companies must be affiliated to state-owned or collectively-owned companies. Gong chose to align with a state-owned company.
In 1993, Gong restructured his company and renamed it the Hubei Tianfa Enterprise Holding Company.
Encouraged by the local government, Gong aimed to list the company on the stock market. However, according to Chinese securities law at that time, private companies must have a certain amount of state-owned shares before they could be listed on the stock market.
Gong decided to offer 6,310,000 shares to the State-owned Asset Supervision and Administration Commission of Jingzhou in exchange for government support. The two companies under the flag of Tianfa Group, the Tianfa Petroleum Co. and Tianyi Science and Technology, were listed in 1996.
Gong and his Tianfa Group became renowned, and at the request the local government, the Tianfa Group took over fifteen struggling state-owned local companies. In 1996, Gong had 270 employees, but by the end of 1998, the number had jumped to 20,000.
However, key questions were overlooked during the acquisitions. It was not clear whether it was Gong or the local government who actually owned the new Tianfa Group, and who had the final say in critical company decisions.
"In some sense, Gong was a victim," said Zhou Yonggang, a senior reporter from China Business Times. "The local government helped Gong's company get listed and they crammed failed companies into Gong's hands. And these failed companies finally brought down Gong's own company."
The failed companies, along with around 20,000 employees, became a heavy burden for the Tianfa Group. It was huge task for Tianfa to solve the employment and retirement pension problems of the new staff.
"Gong's success helped relieve the unemployment situation in Jingzhou. Generally, when a private company is in good condition, the governments are willing to help and they also benefits from successful enterprises," said a member of staff at the Shanghai Stock Exchange, who is familiar with the Tianfa Group story. "However, when the private company meets difficulties, the governments abandons you; and they even use legal tools to persecute you."
"In China, private business must rely on government support because the government has all market resources under its control. However the government can turn its back on you as soon as it realizes you are no longer useful," the source, whoasked not to be identified, added.
In 2001, Tianfa started to falter. The company's net profits in 2001 fell to RMB 22.34 million ($2.86 million), 95.73 percent lower compared to a year earlier. In 2002, the company lost RMB 25.49 million ($3.27 million).
An investigation by the China Securities Regulatory Commission (CSRC) found that Tianfa Petroleum Co. had made inaccurate statements in its annual reports for 2000 and 2001. The CSRC subsequently issued a reprimand to Tianfa Petroleum Co. following the investigation, according to a China Securities Journal report.
In 2004, the Industrial and Commercial Bank of China (ICBC) brought Tianfa Group to court for the non-payment of loans totaling RMB 149 million ($11.6million).
Tianfa Group's financial difficulties were created by overexpansion and overinvestment, according to an analytical report released by ICBC. The Tianfa Group invested RMB 800 million ($102.5 million) in two oil and gas depots. However, the huge investment did not return any profits because of China's oil policy and the breakdown in the company's cash flow.
Tianyi Science and Technology Co, another listed company of the Tianfa Group, also met financial troubles and was later taken over by the local government as state-owned assets.
Gong was very disappointed by Tianyi's fate. "Tianyi was acquired with Tianfa Group's assets, and I paid dearly for the growth of Tianyi. Now the government took it away so easily," Gong was quoted by China Securities Journal as saying.
Two factors have led to the failure of the Tianfa Group, an insider was quoted by China Securities Journal as saying. First, the company was expanding too fast, which led to the breakdown of its cash flow; and second, it was never clear who controlled the company.
Rumours that Sinopec was in talks with the local government on a possible acquisition lifted the share price of Tianfa Petroleum by about 17 percent this week before trading in the company was suspended again on Thursday Jan. 11.
Gong may face charges of illegal use of funds, the abuse of power, and even more severe criminal charges including fraud, the Beijing Times said.
However, the future of the Tianfa Group remains a puzzle.