The Zhongshe mine and two others, in Shanxi Province in northern China, are at the center of unusually public accusations of mismanagement and corruption afflicting one of the nation’s flagship state conglomerates, China Resources. Critics say that the $1.6 billion purchase was vastly overpriced and illegal and that large sums may have been squandered or, as some are claiming, improperly diverted.

Leaked documents about the deal, and a court case in Hong Kong, have shed an unusually harsh light on the usually secretive workings of a major state-owned company. The disputed deal raises a stark question: Are China’s economy and resources held hostage by privileged state corporations and their executives, who can use influence and gain access to easy credit in ways that undermine long-term growth?

The dispute has become a chief exhibit in a debate in China about the wisdom of investing so much of the nation’s money in state-owned companies, especially when China’s economy has slowed. For the Communist Party leadership, the case distills concerns about the grip that state-owned conglomerates exert.

The problems for China Resources began in 2010, when its affiliates as well as a partner state company agreed to pay 9.9 billion renminbi ($1.6 billion) for the three coal mines and related assets, according to documents submitted to a Hong Kong court. The seller was a businessman, Zhang Xinming, a man with a reputation as a swashbuckling gambler, who also gained a 20 percent stake in the new joint venture.

The deal appeared to give China Resources a foothold in the coal industry here in Shanxi, the hub of China’s coal industry for more than a century and close to the energy-hungry cities and factories on the coast. But the company’s monthly business operations statements show that since the mines changed hands in 2010, the mines have not produced any coal.

“Legally speaking, this was a totally abnormal transaction,” said Chen Ruojian, a lawyer with the Duan Duan law firm in Beijing. Mr. Chen is helping to represent the minority shareholders in Hong Kong, where the subsidiary behind the deal, China Resources Power Holdings, is listed on the stock exchange.

“It’s impossible to understand why they’d do this — pay so much for mines with expired exploration licenses,” he said. “State-owned companies have all sorts of problems, but we think it’s rare to have something as stark as China Resources.”

Political unease over the case grew after two Chinese journalists made accusations of corruption about the deal, and one singled out Song Lin, the chairman of the parent conglomerate, China Resources.

The Web site of People’s Daily, the Communist Party’s newspaper, has reported that the party’s discipline unit has received an accusation of corruption against Mr. Song and other senior executives at China Resources and is processing the complaint. Mr. Song has not been detained or charged with any wrongdoing, judging from the reports on the company’s Web site of his various public appearances. China Resources has denied wrongdoing and has hinted it might take legal action against Chinese journalists who have raised corruption accusations.

China Resources “is a major global player,” said David Zweig, a specialist in Chinese natural resource companies at the Hong Kong University of Science and Technology. If the claims about the coal mines are proved true, he added, “it would show that these companies can be ripped off or tricked. It doesn’t bode well for the globalization or professionalization of these companies.”

China Resources traces its roots to the days of Mao Zedong’s revolution, when it was established in 1938 in Hong Kong to raise money and buy military supplies to support Communist forces.

By 2012 it was China’s 18th-largest state-owned industrial company by sales, with revenue of $52 billion. Its wide-ranging products include medicine and beer, coal and real estate. Its chairman, Mr. Song, holds the same government rank as a vice minister.

The controversy over the coal deal has made China Resources a lightning rod for criticism of all state-owned enterprises, which produce about two-fifths of the nation’s economic output.

Keith Bradsher reported from Zhongshe, China, and Chris Buckley from Hong Kong.

Article source: http://www.nytimes.com/2013/08/08/business/global/mine-deal-puts-new-scrutiny-on-chinas-state-industries.html?partner=rss&emc=rss