Sinopec Case Again Points to Beijing’s Deception in U.S. Equity Market; Far Eastern Economic Review Scorches S.E.C and Wall Street

(Washington, D.C.): An extraordinary article by Murray Heibert appeared yesterday in the
prestigious Far Eastern Economic Review (FEER) under the headline “Sinopec
Stumbles.” It
documents the financial impact that a pattern of human rights and security-related abuses and
cover-ups by Beijing is having on Chinese efforts to penetrate the U.S. capital markets. Coming
on the heels of the PetroChina IPO debacle in April — which was catalyzed largely by
non-governmental organizations opposed to the oil development partnership its parent company,
China National Petroleum Company, has with Sudan’s odious regime — Sinopec now finds itself
in much the same cross-fire. Moreover, Sinopec and its lead U.S. investment bank may actually
experience an even more debilitating setback insofar as, according to the FEER:
“Some activists
are exploring the possibility of mounting class-action negligence suits against the SEC and
Morgan Stanley Dean Witter, the oil firm’s underwriters.”

The Chinese government’s strategy of massively penetrating the U.S. debt and equity
markets
over the next few years is likely to encounter further expensive difficulties at the
hands of the so-called “PetroChina Coalition,” representing organizations from across the
political spectrum.
For example, the Heibert article makes clear that “one of the [AFL-CIO’s] first targets will be
China’s planned sovereign bond issue in November.” By issuing such billion dollar sovereign
bonds, the Communist Chinese leadership has an opportunity to secure funding from U.S.
investors on an essentially undisciplined, “blank check” basis — allowing Beijing to expend the
proceeds as it alone deems indicated.

Fortunately, this impending bond offering is attracting the opposition of not only organized
labor, but human rights, religious freedom, national security, pro-Tibet, environmental and small
business groups. This “PetroChina Coalition” has combined memberships and outreach of some
20 million Americans sharing a common commitment to the strengthened disclosure,
transparency and discipline to which U.S. investors are entitled — especially when it comes to
“emerging market” entities like those of the PRC and Russia increasingly seeking entry into the U.S. capital markets.

A second cash-hungry Chinese oil giant has limped on to the New York Stock Exchange
after
stumbling into protests from human-rights groups, religious organizations and labour unions
opposed to its investments in Sudan. China’s second-largest oil firm, China Petroleum &
Chemical Corp., or Sinopec, raised about $3.4 billion in an initial public offer on October 18 in
New York, London and Hong Kong.Sinopec had looked set to escape the storm that engulfed the
stock offering of PetroChina, China’s largest oil company, in April. But the day before Sinopec
was slated to set the price for its IPO, The Asian Wall Street Journal disclosed that one of the
company’s subsidiaries maintains an office and has company executives in Sudan. This prompted
human-rights activists in the United States to warn that some of the proceeds from the subsidiary
could be diverted to the Islamic government of Sudan, which has waged a 17-year war against
Christians in the south. But with only a week until the listing, opponents had less time to
generate a storm of protest than they had when PetroChina listed. PetroChina originally hoped to
raise between $7 billion and $10 billion with its IPO but had to be content with just $2.9 billion.
Its share price has since gained 22%, thanks in large part to the surge in international oil prices.

Sinopec priced its global offer at $20.65 per American Depository Receipt, equal to 100
shares.
On October 23, the price in New York had slipped 6% to $19.38, even though three oil
majors–BP Amoco, Shell and ExxonMobil–and several Hong Kong tycoons friendly to China,
including
Li Ka-shing of Cheung Kong and Lee Shau-kee of Henderson Land, had purchased 55% of
Sinopec’s shares in a strategic lock-up.

Some analysts believe that Sinopec’s lacklustre performance is due more to concerns about
the
company than human-rights considerations in Sudan. “If it wasn’t for the big guys underwriting
the shares, Sinopec would have a hard time selling,” says Jim Norman, an oil analyst with
industry newsletter Platt’s Oilgram in New York. “When you read their numbers, you realize
you’re buying a black box. No one outside can say what Sinopec’s real earnings potential is.”
Norman points out that Sinopec imports crude oil at international prices, while selling its refined
petrol in China below market prices.

But human-rights considerations may yet play an important role in determining the value of
Sinopec’s shares. Two days after the oil firm’s IPO, the Commission on International Religious
Freedom sent a letter to the Securities and Exchange Commission, the body that vets stock
listings, asking the SEC to investigate the “accuracy and adequacy” of Sinopec’s filing. The
religious commission, which was established by the U.S. Congress to monitor religious
persecution around the world, charged that Sinopec’s prospectus had “a material omission”
because “nowhere does it disclose any assets or operations in Sudan.”

The powerful AFL-CIO labour union, which organized roadshows opposing PetroChina’s
IPO in
April, was relatively quiet in the days leading up to Sinopec’s listing. But Brandon Rees of the
AFL-CIO’s Office of Investment says the union is focusing on providing investors such as
American pension funds with clear guidelines, including human-rights criteria, to evaluate
listings by companies from emerging markets. One of the union’s first targets will be China’s
planned sovereign bond issue in November. “We’ll watch to see how the proceeds are going to be
used,” says Rees.

In Congress, Republican Senator Sam Brownback is considering legislation that would
expand
the SEC’s role in investigating foreign companies seeking to list in New York. The senator from
Kansas is exploring the option of forcing companies to divulge investments in countries that face
American sanctions. Should Sinopec’s share price fall as a result of a divestment campaign, some
activists are exploring the possibility of mounting class-action negligence suits against the SEC
and Morgan Stanley Dean Witter, the oil firm’s underwriters.

A divestment campaign is no idle threat. Late last year, a diverse coalition of activists
launched a
campaign against Talisman Energy of Canada, which is involved in a joint-venture oil
exploration project in Sudan. Even though Talisman’s net profits are up 400% this year, its shares
are still trading at about 10 times this year’s earnings, whereas many other oil firms are trading at
multiples of 18-20 times earnings. “The successful divestment campaign being waged by
human-rights groups against Canada’s Talisman Energy . . . should prove instructive to Sinopec
and its
investment bankers,” says Roger Robinson, head of the Centre for Security Policy in Washington
and senior economic adviser to former President Ronald Reagan.

“Ever since the South Africa movement, social investing has really blossomed,” says Mark
Melcher, director of research for Prudential Securities in Washington. “Most institutions have to
consider that they have clients who care about things like labour and the environment who can
vote with their dollars.”