A once-prominent smartphone manufacturer in eastern China is on the verge of going out of business after a cash crunch led to its founder — under dubious circumstances — ceding control of the company to local officials.

Beijing-based business news outlet TMT Post published a lengthy investigative article on Monday that details ongoing tensions between the struggling Gongqing Cheng Cellon Communications Technology Co. Ltd., which counts Huawei and Motorola among its clients, and the government in Gongqing, a city of some 200,000 residents in eastern Jiangxi province.

The article quickly went viral online, triggering a stream of discussion on the frequent tensions between private companies and local authorities. Although the Gongqing government denied the accusations on Tuesday, netizens argued its statement was vague and did not address several key questions raised by TMT Post.

Gongqing Cellon, a subsidiary of Cellon Communications Technology Shenzhen Co. Ltd., was founded in 2010. During its first three years, it was the biggest corporate taxpayer and exporter in the city, according to the article. All was going smoothly until October 2013, when local financial institutions demanded that the company pay back 500 million yuan ($75.4 million) before the agreed-upon due date, on the grounds that the smartphone maker was receiving fewer orders. It is common practice for creditors to withdraw loans when they sense that a borrower’s financial situation might be going awry — however, Dai Xiaoquan, the founder and chairman of Gongqing Cellon, told TMT Post this was not the case.

The withdrawal of the loan led to a cash crunch at Gongqing Cellon, which eventually defaulted on a 400 million-yuan debt to a government-controlled investment company, TMT Post said. In December 2013, the government prohibited local banks from lending to the company, Dai told TMT Post; afterward, the company’s repeated attempts to bring in new investors failed due to government interference. As Dai prepared to ink a joint venture with an internet company in November 2013, for example, the authorities called and advised him not to pursue the deal.

In July 2017, the Gongqing people’s court sentenced Dai to two years in prison, saying his company had neglected to pay 3.39 million yuan in taxes to the local government.

By Tuesday afternoon, the article posted on TMT Post’s public account on messaging app WeChat had been viewed over 100,000 times — the maximum amount displayed by the platform — with its meticulous reporting on Dai’s fall and his company’s fruitless attempts to restructure its debts drawing close scrutiny from netizens.

In the article, Dai said he was forced to give away his stock in the company to then-Party secretary Huang Bin and then-deputy mayor Zhan Zheng. When Dai first turned down their request, Zhan reportedly “splashed a kettle of hot water” on his face and hurled curses at him. Dai was put under house arrest for two months, until he eventually yielded and agreed to the officials’ demands.

“Who gave the order to the financial institutions to withdraw the loans? Who illegally detained Dai Xiaoquan and demanded his shares? And who made Zhan Zheng so brazen that he felt he could disregard the law?” asked one netizen.

In a statement published Tuesday on microblog platform Weibo, the government of Gongqing said the smartphone maker owed local banks 736 million yuan and attributed the company’s failure to declining orders from Motorola.

The government added that it had injected 90 million yuan into the company in hopes of rejuvenating its business, and it blamed any failed attempts to restructure debts on the company itself.

However, the statement did not address whether government officials had coerced Dai into giving up his shares, or what had caused the initial cash crunch at Gongqing Cellon. Instead, it said the company had delayed salary payments to employees and shown signs of “illegal behavior during its operations.”

Sixth Tone’s repeated phone calls to the Gongqing government went unanswered on Tuesday.

In an interview with National Business Daily on Tuesday, Zhan denied that he had asked local banks to stop lending money to Gongqing Cellon. Rather, he said the government had lent 100 million yuan to the smartphone maker, without interest, so that it could pay back some of its bank loans.

Zhan also denied asking for Dai’s shares: “His company is insolvent now, with a debt-to-asset ratio exceeding 200 percent,” he said. “Who would ever want his stake?”

However, he added that it was “reasonable” for the local government to get shares in the company because — given the poor financial performance of Gongqing Cellon — it was not clear whether the company could pay back its debts to the government even after bringing in new investors.

Huang was expelled from the Party earlier this year on corruption charges, his property and possessions repossessed. Zhan, previously a finance professor at Jiangxi University of Finance and Economics, resumed teaching after his term in government ended.

This article has been updated to include Zhan’s comments to National Business Daily.

Editor: David Paulk.

(Header image: Three women work on a mobile phone production line at a factory in Jiujiang, Jiangxi province, Nov. 10, 2010. Hu Guolin/VCG)