Prudential Securities — Potomac Global Equity Research Perspective, March 22, 2000

“PetroChina Dustup: The Start Of Something Big”
By Mark L. Melcher and Stephen R. Soukup

Social investing, once considered by most professional money managers to be a nuisance, at
best,
and a violation of their fiduciary duty to maximize return, at worst, is well within the mainstream
of the investment community today.

‘Social Investing’ Has Become An Integral Part Of The Financial
Markets… The nation’s
largest mutual fund companies routinely introduce new socially screened funds aimed at
attracting customers on both sides of the political spectrum, from liberals who refuse to buy
stock in companies with bad environmental records, to conservatives who won’t invest in firms
that deal in pornography or those that give money to abortion-rights groups.

It is safe to say, I believe, that virtually every major trust company in the nation routinely
applies
social investment screens to some of their largest accounts. Fewer and fewer state and local
governments are free from legislatively mandated restrictions based on social criteria. And
experts in the area say the concept has, in the past few years, set down firm roots all across
Europe.

…Blending Gracefully Into The Business. For the most part, this baby
boomer-led trend has
advanced smoothly across the Wall Street landscape, since breaking onto the scene in the early
1980s as a major part of the campaign against apartheid in South Africa. In fact, rather than fight
it, some of the largest investment firms in the land have embraced it as a powerful marketing
tool.

The Story Is, However, Quite Different In The World Of Investment
Banking… Recently,
however, this cuddly little concept joined forces with some very important political players with
highly aggressive political agendas, and together they have found their way into the rarefied
world of investment banking.

There, the picture is decidedly different. There, there is blood on the floor already, and the
prospect is that it will get increasingly sanguineous in coming years, as the much-vaunted
“globalization” trend leads America’s bankers ever more deeply into financing projects in
nations that are considered by some to be serious security threats to the United States, by others
to endanger the perks of U.S. organized labor, and by still others to be affronts to internationally
recognized moral norms.

…With Goldman’s PetroChina Offering A Glimpse Of The Future. As I
write this story, I
am, of course, thinking about the ongoing flap over Goldman-Sachs’s proposed $10 billion, then
$7 billion, then $5 billion, and now $3.1 billion IPO for PetroChina, China’s largest producer of
crude oil and natural gas.

This is an offering that, at a time when gasoline prices are skyrocketing, should be welcomed
by
American consumers and investors alike. Instead, it is being aggressively opposed by an unlikely
coalition of conservative foreign policy experts, organized labor, the Christian right, and the
“human rights” left.

This is an offering that hasn’t even had a road show yet, but that has already been rejected by
the
likes of the California Public Employees’ Retirement System (CalPERS), the Teachers’
Insurance and Annuity Association and College Retirement Equities Fund (TIAA-CREF), the
New York City Employees’ Retirement system, the Kansas Public Employees’ Retirement
System, and the Employees’ Retirement System of Texas, to name just a few.

To some observers this is little more than an amusing dustup between one of Wall Street’s
most
powerful firms and a motley assortment of economic Luddites from the netherworld of politics,
whose hand has been temporarily strengthened by an unfortunate, but transitory, cooling of
relations between China and the United States, as a result of some short-lived political jostling
related to an election in Taiwan.

The Assault On PetroChina, Which Will Likely Have A Tremendous Impact On
The
Investment Banking Business… I think these folks are dead wrong. I think this is, as the
song
goes, the start of something big. Simply stated, I think when the dust settles on this dispute, the
gurus of international investment banking will find that their jobs have been made permanently
more difficult by the appearance of a new social investment category that has been declared
taboo by some of their largest customers, and by the addition of a new and highly complicated
variable to their already-crowded due-diligence agendas.

…Is Spearheaded By Roger W. Robinson, Jr., And The William J. Casey
Institute. For the
time being, the locus of this effort to complicate their lives is in Washington, where the brains
and energy behind the movement, Roger W. Robinson, Jr., resides. Robinson is the dynamic
chairman of the prestigious William J. Casey Institute of the Center for Security Policy, a
nonprofit group that “addresses the nexus between national security and international money
flows.” Formerly, he was senior director of International Economic Affairs in President Reagan’s
National Security Council. Prior to that, he was a vice president at Chase Manhattan, with
responsibilities for the bank’s loan portfolios in the former Soviet Union, Central/Eastern
Europe, and Yugoslavia.

But Robinson’s efforts to influence Washington’s legislative and executive branch hotshots
are
only a minor part of his overall campaign, which is focused increasingly on the nation’s money
management firms and their customers.

Washington’s legislators and bureaucrats can, of course, write laws and regulations to restrict
the
flows of funds to certain categories of nations. But this takes time, and as we have seen with the
“Most Favored Nation” idea, such efforts have a way of becoming toothless after a while.

Being fully aware of this fact, and having studied the anti-apartheid campaign and its
evolvement
into the social investment movement, Robinson believes that the best way to directly limit the
flow of investment funds to countries that he and like-minded conservatives believe are a threat
to the United States would be to focus his efforts on those who own and control the money.

Robinson Organized A Coalition Of Varied Interests To Oppose The PetroChina
Deal…
Robinson has, of course, already begun this process. For starters, he helped form a coalition of
groups with a common loathing for the Chinese communist state. As stated above, these include
organized labor, Christian groups, and organizations interested in fostering human rights.

…Advised Institutional Investors Of The Deal’s Risks… Next, he informed
large institutional
investment firms across the nation that they may be taking a serious fiduciary risk if they buy the
PetroChina deal, if for no other reason than the fact that his organization intends to make it a
pariah issue.

Robinson is not timid in comparing this effort to the anti-apartheid campaign in the 1980s,
which
had considerable success in negatively affecting the value of investments in firms with
operations in South Africa. He is also quick to point out that if the Chinese leaders should
declare war on Taiwan, as they have threatened to do recently, the PetroChina paper could be as
worthless as the pretty, framed Czarist bonds that decorate offices, bars, and recreation rooms
across the land today.

…Has Started To Educate The Public About His (And Others’) Concerns…
Finally, he has
begun the process of informing the public of the moral hazards and social costs of investing in
China and other such nations. An example of the kind of rhetoric used in this campaign can be
found in an article that appeared in the January 24, 2000, issue of Insight Magazine,
entitled
“China Cashes In,” and subtitled “Unwitting investors may be financing nuclear proliferation and
human-rights abusers as Beijing goes to the U.S. equity and bond markets for billions of dollars.”

Is your individual retirement account bankrolling Communist China’s nuclear-weapons
program? Is that promising oil stock in your portfolio financing a war of extermination against
Christians halfway around the world? Could your pension fund be weakened because it holds
shares in companies about to be slapped with sanctions for investing in terrorist regimes?
Chances are you don’t know, even if you read the fine print in the prospectus.

Nuclear proliferators, terrorist states, foreign scam operators, and Third World mass
murderers
literally have been banking on the failure of the United States to demand adequate transparency
and disclosure of the equities and bonds they introduce in U.S. capital markets. As a result,
unwitting American investors potentially have been pumping their cash into everything from
Russian organized crime to a vicious ethnic-cleansing campaign in Africa to peddlers of weapons
of mass destruction in Communist China. The big New York financial houses don’t seem to care,
say critics, as long as the money rolls in — and the Asia growth funds that hold Chinese state
firms are among the higher performers in the market. . . .

Because there is currently no national-security-based review of entities seeking to gain
access to
our capital markets, investors are unlikely to know that they may be assisting in the proliferation
of weapons of mass destruction by providing funds to known proliferators. Aside from the moral
implications, there are potential financial consequences of proliferation activity — such as the
possible imposition of trade and financial sanctions — which could negatively impact investors.

Just a few decades ago, revelations such as these would almost certainly have fallen on deaf
ears.
There were considerably fewer Americans with equity and bond holdings at that time, and
money managers were virtually unanimous in their view that maximizing return was their sole
consideration.

Today, with widespread public ownership of stocks and bonds, and the social investment
movement in full bloom, a growing number of Americans actively screen their investments
against a wide range of social criteria, and expect those who manage their retirement funds to do
the same.

…And Has Shaken Things Up In Washington As Well. All of this is not
to say that Robinson
is not beating the bushes in Washington also. In fact, he has very clear Washington goals, which
he lists as follows:

• Strengthening disclosure and reporting requirements with regard to foreign entities
  already in — or seeking to enter — our capital markets.
• Recommending the voluntary integration of these material, nonfinancial
  [emphasis in
  original] considerations into the due diligence process performed by U.S. private and
  public portfolio managers.
• Urging the temporary denial of access to the U.S. capital markets in the event of
  egregious national security and human-rights abuses until such time as these abuses are
  redressed or remedied.

Space does not permit a comprehensive rundown of how his Washington efforts are faring,
but
excerpts from a recent press release from his office will, I think, provide some insight.

Senator Sam Brownback (R., KS), the chairman of the Near Eastern and South Asian Affairs
Subcommittee of the Senate Foreign Relations Committee, today lent his considerable influence
to the campaign to prevent American investors from unwittingly aiding genocide, slave-trading
and terrorism in Sudan — a prospect looming thanks to a Chinese government-owned company’s
multi-billion-dollar initial public offering, expected to be issued on the New York Stock
Exchange next month. The Senator weighed in via a letter to the chairman of the Securities and
Exchange Commission, Arthur Levitt, Jr., asking him “to recommend either a listing denial or, at
the very least, a cooling-down period of at least 90 days, providing ample time for Congress to
review the full implications of a PetroChina entry into the U.S. capital markets.”

Sen. Brownback’s letter comes on the heels of letters on the same subject sent over the past
ten
days by two other influential Members of Congress — Reps. Michael Oxley (R., OH), chairman
of the House Commerce Subcommittee on Financial and Hazardous Materials (which has direct
oversight over the SEC) and Spencer Bachus (R., AL), chairman of the House Banking
Subcommittee on Domestic and International Monetary Policy. . . .

[T]he Brownback letter concludes with a powerful admonition:

“The brief window presently planned [for SEC review of the PetroChina IPO] would provide
little time for adequate scrutiny by possible investors, particularly in light of the growing
controversy surrounding this proposed listing. American capital markets should not service
Khartoum’s destructive ambitions. At the least, American investors should be fully informed of
the dire consequences for millions of people associated with this prospective stock purchase.”

Robinson’s National Security Concerns Are Not Confined To
PetroChina… Before closing,
it is, I think, important to note that Robinson’s interest isn’t confined solely to the PetroChina
deal and any future offerings from China, Russia, or other nations that he describes as “global
bad actors.”

He also actively questions the wisdom of investing in the dozens of Chinese companies that
are
already deeply involved in the U.S. financial markets. He notes, for example, that as of
December 17, 1999, CalPERS held some 70 Chinese companies — all but one listed on the Hong
Kong Stock Exchange — with an estimated market value of more than $750 million.

…And He Cautions That Many Funds Already Hold Issues From ‘Global Bad
Actors’…
The result of this, Robinson argues, is that “Californians . . . may be holding the equity or debt of
Chinese government-affiliated entities engaged in military modernization efforts, espionage,
technology theft, human-rights abuses, or other activities inconsistent with American interests
and values.”

He cites a report issued last year by a select committee charged with investigating national
security concerns related to Chinese military and commercial activities in the United States.
Among other things, the committee, chaired by California Congressman Chris Cox, concluded
the following:

Increasingly, the PRC is using U.S. capital markets both as a source of central government
funding for military and commercial development and as a means of cloaking technology
acquisition by its front companies with a patina of regularity and respectability.

He also cites a June 14, 1998, piece in the South China Morning Post as follows:

Nearly 200 Hong Kong companies have been identified as being linked to PLA [Peoples
Liberation Army] or Chinese defense industries. And experts predict a rise in the number of
mainland groups with military or aerospace connections — as well as in supporting industries —
opening “window” companies in the SAR [Special Administrative Region]. The links of PLA
Inc. and defense and aerospace conglomerates run deep into corporate Hong Kong, giving them
access to international markets and technology.

Newspaper accounts have specifically singled out as particularly worrisome the following
four
CalPERS holdings: CITIC Pacific Ltd., CITIC Ka Wah Bank, COSCO Pacific Ltd., and China
Resources.

…Which We Believe They Will Be Forced To Defend Or Sell. So far,
CalPERS, which has
long been a leader in adopting other social investment screens, vigorously defends these and
other such holdings.

But then, so did many managers that held stock in firms with operations in South Africa
many
years ago, until the heat became too intense. We’ll see.