Huge foreign investments made by Hebei Iron and Steel may face greater scrutiny by anti-graft investigators on the mainland and elsewhere after allegations of embezzlement and mismanagement at the company saw the sudden removal of its chairman, Wang Yifang.
Hundreds of millions of dollars were spent on Wang's watch as he built the group into what the World Steel Association ranks as the world's third-largest steel company, acquiring mines in Africa, Canada and the United States since taking charge in 2008. Even in the weeks before Communist Party bosses cut short his reign earlier this month, he was chasing new foreign partnerships.
"When a firm such as Hebei Iron and Steel encounters a management crisis over governance or performance, its overseas operations can be disrupted or tied up in litigation by creditors and regulators," Daniel Rosen, a partner at US consultancy Rhodium Group, told the South China Morning Post.
"Firms in many countries are interested in Chinese suitors because they offer the prospect of advantageous links to sell back into the Chinese economy. Instead, it turns out that the inexperience of many Chinese firms, especially state-related firms, at handling growth and international operations presents more risks than benefits in some cases," said Rosen, whose firm tracks investments by Chinese companies in the US.
Much uncertainty remains over the specifics of the allegations made about Hebei Iron and Steel, which is owned by the government of the northeastern Hebei province and produced 42.8 million tonnes of steel last year, according to the WSA.
Yu Yong, installed as Wang's replacement as chairman, told a meeting of the firm's senior managers on December 9 that cash, resources and profits in some subsidiaries had been embezzled, according to the company's website.
Without naming anyone, Yu said many employees had treated the company as "a paradise for making personal fortunes", despite the group running losses. The website said the problems were widespread and had existed for a long time, resulting in a shocking loss of funds.
Wang risks punishment by the Communist Party or the Hebei government for breach of duty as chairman, regardless of whether he was personally responsible for any embezzlement, a lawyer specialising in Chinese law told the Post.
The lawyer, who declined to be identified, added that there were also potentially serious consequences for the fate of the organisation's overseas investments if investigations revealed Hebei Iron and Steel's finances to be far weaker than previously stated.
If there were insufficient funds within the group to make good on any losses sustained, then the parent company might be forced into a fire sale of assets, the lawyer said.
The most recent foreign forays made on Wang's watch include July's purchase by Hebei Iron and Steel of a 35 per cent stake in South African-listed Palabora Mining, where the Chinese firm was part of a consortium that acquired 74.5 per cent of South Africa's biggest copper-mining firm for US$476 million; a C$194 million (HK$1.4 billion) deal in April 2012 with Canada's Alderon Iron Ore for a stake in mining assets; and a May 2011 agreement with Australia's Richmond Mining worth US$170 million to develop the Buena Vista Iron Ore Mine in the US state of Nevada.
The allegations of wrongdoing could also trigger calls from shareholders in partner and invested companies to distance themselves from Hebei Iron and Steel.
Hugo Williamson, managing director of Risk Resolution Group, a British consultancy, said such allegations could result in extra scrutiny of a wide range of relationships that foreign firms had with Chinese state-owned enterprises.
Deals with companies in Canada in particular were likely to be examined by domestic investigation agencies if allegations of bribery were involved, Williamson said.
Hebei Iron and Steel did not reply to repeated requests for a response to questions from the Post.