Investors Shun PetroChina Offering; Future Of Other ‘Red Chips’ In

In the face of strong opposition, PetroChina’s stock finally was listed on the New York Stock Exchange Thursday. It was priced at the low end of if, predicted range, and finished Monday at $15.18, lower still.

The dealings of its parent company, state-owned China National Petroleum Corp., in Sudan and Tibet had brought together a diverse coalition of opponents concerned about human rights and national security.

PetroChina was supposed to pave the way for other Chinese state entities to tap the reservoir of U.S. capital markets to fuel China’s stagnating economy. But even though other listings may not attract the controversy this oil company’s has, they too may find the U.S. an increasingly dry well.

The Financial Times reported that China has postponed international listings of another state-owned oil company, China Petrochemical Corp. (Sinopec) and an iron and steel company because of decreasing investor demand.

PetroChina is “not an anomaly,” said Brookings Institution economist Nicholas Lardy. “There’s not that big an appetite for having a minority share and no say in governance in a Chinese state-owned company, except under unusual circumstances.”

Indeed, in what Lardy calls “the state-owned enterprise problem,” China has not moved rapidly toward real shareholder ownership, and the balance sheets of the state-owned firms there reflect it.

The AFL-CIO campaigned against the listing of PetroChina’s stock, stressing the ownership question.

Steve Diamond, a securities law professor at Santa Clara (Calif.) University who assisted the AFL-CIO in its effort, says he cited corporate governance problems as well as human rights issues when talking to fund managers. “There’s really no distinction between this company and the Chinese Communist Party,” Diamond said. “Being an oppressed minority shareholder could be putting it mildly.”

Goldman Sachs spokeswoman Kathleen Baum declined comment, saying the “quiet period” lasts another two weeks.

Brookings’ Lardy said PetroChina is part of “a long-term structural problem that’s going to affect the way the Chinese economy develops, and it has major implications for lenders (and) investors.

“In short, the evidence does not really support the view that the state manufacturing and commercial sector is withering away rapidly,” Lardy wrote in his book, “China’s Unfinished Economic Revolution.”

In fact, in many respects the sector is growing, Lardy notes. Although the state’s share of output has declined in the past 20 years, owing mostly to the efficiency of new, small private firms, the state has added 40 million employees since reform and has greatly increased its assets.

How are state firms doing? China’s own figures show that the profitability and productivity of state-owned firms have steadily declined over the past 10 years, Lardy says, and much of that can’t be attributed to reform of pricing and accounting practices.

Investors also may be stuck holding the bag for what the World Bank calls a “pension crisis in the state-owned enterprise sector,” with implicit pension debt equal to about 50% of China’s gross domestic product.

And despite press accounts referring to the international stock offerings of PetroChina and the, red chips as “privatizations,” the Chinese government remains in full control of the offshoots of its companies listed on Hong Kong and overseas exchanges, Lardy says.

By law, managers of state-owned companies can sell no more than a third to foreign investors. “The paradigm they’ve relied on of selling off partial shares of their state-owned companies without any change in their corporate structure, I don’t think in the long run is going to be attractive for foreign investors,” Lardy said.

In fact, Lardy thinks the disinvestment campaign had little to do with PetroChina’s fate. “I think the people who campaigned against this issue are getting way too much credit,” he said. “I have respect for the people who run these pension funds. There are more attractive investments out there, quite apart from the pressure from organized groups.”

Yet many pension funds seemed oblivious to the risks of Chinese state-owned companies before the campaign, notes Roger Robinson, head of Washington-based Casey Institute and a leading critic of PetroChina.

“The intensity of the PetroChina controversy without doubt raised the level of awareness in the markets concerning the problems besetting Chinese state-owned firms…which would have otherwise been low on the radar screen,” he said. Before the campaign, Robinson said, many fund managers ” seem to believe that being listed on the Hong Kong Exchange was synonymous with a non-mainland entity.”

This may have been the case with the California Public Employees’ Retirement System, the nation’s largest public pension fund.

When IBD wrote in July about Calpers’ investment in four offshoots of Chinese state enterprises linked to the military or espionage, Charles Valdes, investment chairman, charged in a press release that the “firms originated and have operated from Hong Kong.”

Valdes also said that red chip Citic Pacific was “independent of the Beijing government.” But Lardy said the company is “undoubtedly controlled” by its parent, state-owned China International Trust & Investment Corp. The parent is headed by arms dealer Wang Jun.

In recent hearings in the California Joint Legislative Audit Committee, it was discovered that Calpers might have been violating its own investment policy. Since June, mainland China has been n the list of countries in which Calpers fund managers are banned from investing.

Investments in Hong Kong are permitted, but many say the investments in the red chips demonstrate the need for a legislative audit, which may be voted on this week. “To say Citic and Cosco (the China Ocean and Shipping Co.) are not Chinese companies is absurd,” said Daryl Thomas, legislative assistant to California state Sen. Ray Haynes, R-Riverside. “They’re clearly in violation of their own policy.”

Calpers, in a statement, welcomed the audit and denied any violations had occurred. In January, Calpers said it would pass on the PetroChina offering.

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