Respected Far Eastern Economic Review Captures Broader Message to the Markets Embodied in PetroChina’s IPO Fiasco

(Washington, D.C.): The Far Eastern Economic Review added its influential
voice to a growing
chorus of market “wake-up calls” yesterday with regard to the long-term implications of the
PetroChina initial public offering (IPO) now staggering to a New York Stock Exchange listing
next Thursday. In the lead piece of the finance section of the Review‘s current issue,
co-authors
Murray Hiebert and Trish Saywell bring the magazine’s market-wise readers up to speed on an
historic drama that has been playing out since August of last year when China National
Petroleum Company (the parent of a hastily-configured subsidiary called PetroChina) first
signaled its intention to list on the New York Stock Exchange and proceed with a $10 billion
IPO. The headline says it all: “Plans by PetroChina to list in the U.S. have attracted a furious
reaction from a rainbow coalition of labor, conservative and pro-Tibet forces which could
scupper future Chinese listings.”

The Far Eastern Economic Review is, however, but one of a number of
mainstream financial
publications that have taken note this week of the implications of the PetroChina near-meltdown.
For example:

• The current issue of Business Week features an article
  entitled “The IPO of a Chinese
  Petroleum Company Galvanizes U.S. Foes” in which California’s influential State
  Treasurer, Philip Angelides, is quoted as saying “the larger question is how
  safe an
  investment is in countries that do not have freedom or democracy?”

• The front page of today’s New York Times “Business Day”
  section has an above-the-fold
  article entitled “Stakes in China Suddenly Seem Less Appealing.” It reports, “[The
  PetroChina IPO has been] ripped apart by critics ranging from Republican lawmakers to
  Tibetan monks….With PetroChina limping into the market…the prospect for…other deals [e.g.
  “Sinpec, the second-largest oil company; China National Overeas Oil, the No. 1 offshore oil
  company; and China Unicom, the No. 2 telecommunications company] are now cloudier.”

• The front page of the “Companies and Markets” section of today’s Financial
  Times addresses
  the PetroChina deal under the headline “Chinese Issue Disappoints.” It notes that “The
  success of the PetroChina IPO will have a significant bearing on the ability of many Chinese
  state-owned enterprises to tap the international markets for funds as they prepare for the
  onslaught of foreign competition following China’s accession to the World Trade
  Organization. Some fund managers, however, think that a cancellation of the
  [PetroChina] IPO would be better for the [follow-on] IPO hopefuls. ‘There will, of
  course, be embarrassment if the whole issue was pulled,’ said one Western fund manager.
  
  ‘But the consequences will be worse if people get their fingers burned again,
  as it would
  mean that the investment community will steer clear of future Chinese
  issues.'”

Far Eastern Economic Review, 6 April 2000

Market Morality: Plans by PetroChina to List in the U.S. have
Attracted a Furious
Reaction from a Rainbow Coalition of Labour, Conservative and Pro-Tibet Forces, which
could Scupper Future Chinese Listings

By Murray Hiebert in Washington with Trish Saywell in
Shanghai

Two New York hotels, two visions of China. At one, a group of Goldman Sachs investment
bankers is trying to convince 150 fund managers to jump on board the imminent initial public
offering of Chinese oil company PetroChina.

Nearby, in another hotel, speakers including labour leaders, human-rights activists and
environmentalists warn that buying stocks in PetroChina would be a disaster.

“It’s ethically wrong and economically wrong to invest in PetroChina’s IPO,” Rich Trumpka
of
the powerful AFL-CIO labour union declares. He’s followed by a Tibetan monk who displays a
device resembling an electric cow-prod that he says is similar to the weapon Chinese officials
used to torture him with. On the street outside, protesters carry yellow umbrellas inscribed with
“Goldman Sachs: Shame.”

The contrasting scenes from the two March 22 events give some idea of why PetroChina’s
April
6 listing on the New York Stock Exchange has become one of the most controversial IPOs in
years, and why it could have a lasting impact on the way companies list in the United States.

The success of American labour, religious an human-rights groups in convincing giant
pension-fund managers not to buy PetroChina’s stock is turning into a public-relations nightmare
for
China. Officials at PetroChina, listing vehicle of the state-owned China National Petroleum
Corp., had been eager to see their IPO succeed because they hoped it would lay the groundwork
for other capital-starved Chinese state companies to tap into the U.S. stock market, on top of the
nine Chinese companies that already have listed there.

Now, analysts say, the campaign launched by the coalition against PetroChina could end up
doing the very opposite, making it more difficult for traditional Chinese companies to float in the
U.S. But not all Chinese companies will be affected equally. Internet start-ups are likely to
continue winning a warm reception, helped by their looser links to the state and the continuing
fever surrounding new-economy stocks. Two such listings are planned for later this year:
Sina.com and Sohu.com.

“The enduring legacy of the PetroChina IPO will likely be that non-financial considerations,
particularly involving national security and egregious human-rights abuses, will henceforth need
to be taken into account by the capital market[s],” says Roger Robinson, head of the [William J.
Casey Institute of the] Centre for Security Policy in Washington and formerly senior economics
adviser to U.S. President Ronald Reagan.

Robinson insists that the critics of PetroChina don’t want to erect barriers to the free flow of
capital. What they want is for companies that go public to share more details on their activities
and financing structure than they are currently required to provide. “U.S. and other investment
banks and fund managers would be wise to expand voluntarily their due-diligence
risk-assessments [to incorporate national security] and human-rights related concerns,” Robinson
says.

Analysts say the current campaign against PetroChina could prompt delays in other old
economy
listings being planned by Chinese companies, including those by China National Petrochemical
Corp., China National Offshore Oil Corp. and Baosteel of Shanghai.

Dozens of giant U.S. pension funds already have declared that they won’t participate in
PetroChina’s offer. They include the Teachers Insurance & Annuity Association-College
Retirement Fund, the world’s largest pension fund with $280 billion in assets, and the California
Public Employees’ Retirement System, with assets totalling $170 billion. “Without the big
players, there’s a question about how well its shares will perform,” says a fund manager in New
York.

This wasn’t the way things were supposed to turn out. PetroChina, which will rank as the
world’s
fifth-largest oil company in terms of petroleum reserves and is expected to achieve profits of
almost $3 billion this year, was to have taken the U.S. market by storm. Its IPO on April 6 was
expected to raise $7 billion-10 billion, exceeding the $4.2 billion raised by China Telecom (Hong
Kong) in its 1997 Hong Kong listing. But in recent weeks, that estimate has been scaled back to
$2.8 billion-3.5 billion, due in part to a general slide in oil share prices and uncertainty about just
how to value PetroChina.

“Just how much is PetroChina worth?” asks James Dorian, an international energy economist
based in Honolulu. “It’s difficult at best to estimate its value.” Dorian notes that Chinese
estimates of its reserves “have been downsized tremendously over the last 15 years because the
original geological estimates were incorrect,” adding: “This is a company in which the valuation
is influenced not only economic measures but also political and social factors, so it’s very
complicated.”

But the drop also can be attributed to opposition from a vocal coalition that unites religious
freedom groups and labour unions with left-leaning environmental groups and conservative
national security bodies. Among other concerns, labour is anxious about PetroChina’s continuing
links to China’s government, which it accuses of abusing human rights, and press reports that the
company plans to lay off up to a million workers after the IPO. Meanwhile, the Tibet lobby and
greens are concerned about the impact on the environment in Tibet if a cashed-up PetroChina
undertakes new drilling activities or lays a new pipeline there.

But the harshest attacks come from religious and human-rights groups concerned about
investments by PetroChina’s parent, China National Petroleum Corp., in the African country of
Sudan. These groups say a war by Sudan’s Islamic fundamentalist government against rebels in
the country’s largely Christian south is being funded by an international oil joint venture in
which CNPC holds a 40% stake. The venture’s other members are Talisman Energy of Canada
and Petronas of Malaysia. “This project gives the government the means to fight the war and
commit genocide against religious minorities in the south,” says Nina Shea, director of the
Freedom House’s Centre for Religious Freedom and a leader of the campaign against
PetroChina.

Freedom House spearheaded letters by many of America’s top religious leaders to 200 key
pension funds urging them not to invest in PetroChina. The 30-million-member strong AFL-CIO
wrote to 42 fund managers asking them to boycott the IPO. “We’re involved because of our work
on the retirement savings of American workers,” says Bill Patterson, director of the union’s
office of investment. “It is our responsibility to work with pension funds to maximize returns . . .
This IPO is an inappropriate transaction for funds that have a long-term horizon.”

Members of Congress also have joined the fray, raising the stakes at a time when the Clinton
administration is already in the midst of a lobbying effort to convince reluctant lawmakers to
approve permanent Normal Trade Relations status with China (formerly known as
most-favoured-nation trading relations). Several U.S. lawmakers have written to the Securities
and
Exchange Commission, asking the body that approves listings to delay approval for PetroChina
pending a fuller review of the company and its operations. Representative Spencer Bachus, the
Republican chair of the House Committee on Domestic and International Monetary Policy, said
in a letter to SEC Chairman Arthur Levitt that the regulator should delay the listing by 90 days to
give it time to “determine whether sufficient disclosure has been provided to potential investors”
in the registration process.

Bachus has also questioned whether the restructuring of China National Petroleum Corp.,
which
puts PetroChina in charge of domestic holdings, and leaves CNPC running the controversial
foreign operations, really will serve as a “firewall” to protect U.S. investors. In his letter to the
SEC, Bachus said there is no question that the funds raised in the U.S. “will significantly
increase CNPC’s access to financing that would otherwise be unavailable to fund its foreign
operations.”

The congressman is drafting legislation that would strengthen disclosure and transparency
requirements by foreign companies seeking to raise funds on Wall Street.

Opponents haven’t been content to just target PetroChina. In late March, international oil
giant
BP Amoco gave the flotation a huge boost by announcing it would spend up to $1 billion to take
a 20% stake in the IPO. In exchange, the Chinese oil firm signed a letter of intent with BP
Amoco calling for the establishment of a gas-marketing joint venture in eastern China.
PetroChina’s critics promptly responded with talk of a citizens’ boycott of Amoco’s petrol
stations in the U.S. and plans for a divestment campaign similar to the one against CNPC partner
Talisman of Canada. Talisman’s stock price has plunged 30% since human-rights activists
started targeting the company seven months ago for its role in Sudan.

The campaign against PetroChina comes at a time of increasing involvement by American
labour
and human-rights groups in global economic issues. Last November, thousands of demonstrators
vented their frustration about free trade and corporate globalization at a World Trade
Organization meeting in Seattle. In mid-April, dozens of protest groups are planning to converge
on Washington to highlight their opposition to the policies of the World Bank and International
Monetary Fund, which they say are impoverishing less developed countries. Now for the first
time, these groups are focusing on the behaviour of foreign companies seeking to list on
American stock exchanges–a process that looks set to make life a lot harder for old-style Chinese
companies emerging from the state sector.

“Everything China tries to do will face criticism,” says David Hale, Chicago-based global
chief
economist of Zurich Financial Services. “It’s the reality of doing business in China.” Steven
Schoenfeld, head of international equity strategies for Barclays Global Investors in San Francisco
says the current “opposition will add a new layer of concern at the underwriter level. It’s not
stretching it to say the problem could snowball a little,” Schoenfeld says, comparing the current
campaign against PetroChina with earlier campaigns in the U.S. against tobacco stocks.

But market-watchers don’t believe the difficulties facing PetroChina will cause Chinese
listings
in the U.S. to completely dry up. “Investor appetite will depend on the newness or oldness of the
industry,” says Schoenfeld. “If you had a Chinese Internet start-up with little government links,
you’d get more enthusiasm.”

That’s a view echoed by David Lui, portfolio manager of Strong Overseas Fund in New
York:
“If they’re in the right industry, the investor will respond,” he says. “No level of demonstrations
will be able to scuttle those offerings.”