Insight blows cover of PRC run at US capital markets

‘PetroChina’ Deal Suffers from Growing Controversy

(Washington, D.C.): Today’s Wall Street Journal offers the latest indication of China’s ambitions to tap into the U.S. debt and equity markets are running into costly — and potentially debilitating — difficulties. Although the article entitled "PetroChina Hopes to Shake Off Its Past" was clearly intended to promote an anticipated, multi-billion dollar initial public offering by this hastily configured "subsidiary" of China National Petroleum Company (CNPC), the facts revealed suggest a deal in trouble.

First, there is the matter of CNPC — a company described by the Journal as "synonymous with state planning and run as a quasimilitary organization." Its overseas’ activities, moreover, involve ties with some of the most reprehensible actors on the planet, notably its largest foreign investment in terrorist- and slavery-sponsoring Sudan:

PetroChina’s creation in November followed criticism in the U.S. of a joint venture that CNPC had [read, has] in Sudan with a Muslim fundamentalist government accused [sic] of persecuting Christians. To keep human-rights activists from blocking the listing, underwriters say the oil field in Sudan, and other projects overseas, will stay with parent CNPC….

"The fact remains that American investors would be funding a company with a large and growing presence in Sudan," says Nina Shea, a member of the board of the U.S. Commission for International Religious Freedom. Worries that investors may balk at a company with such baggage has forced underwriters Goldman Sachs Asia and China International Capital Corp. to scale down the size of the offering and cut the stock’s asking price. Although the listing, which is expected next month on the New York and Hong Kong stock exchanges, is almost sure to top the $4.2 billion offer in 1997 by China Telecom (Hong Kong), it will be significantly smaller than the $10 billion offering originally envisioned and the $8 billion that was being discussed just last month.

In other words, in response to growing criticism from a coalition of organizations and individuals concerned with human rights, religious freedom and national security, CNPC has had to: 1) conjure up — in the midst of its IPO bid — a new "domestic-only" holding company called PetroChina; 2) change the purposes towards which IPO proceeds would be directed from potentially lucrative overseas oil development activities to unappealing "debt repayment and severance compensation" requirements of a bloated state-owned concern; 3) reduce the size of the offering by roughly half (from its originally envisioned $10 billion amount); and 4) offer a price/earnings ratio well below that of most global energy companies coming to market, thereby lowering the market value of the new holding company.

The controversial efforts of CNPC — and that of other dubious Chinese state-owned or -controlled firms — to penetrate the U.S. capital markets is the subject of the attached, exceptionally comprehensive and important cover story in this week’s Insight Magazine by J. Michael Waller. It provides a primer for one of our times’ key emerging national security issues.