Sinopec Comes to Market as China Taps Unsuspecting U.S. Investors for Funds to Support Nefarious Activities

(Washington, D.C.): The listing and trading of a $3.4 billion Initial Public Offering by China
Petroleum and Chemical Corporation (Sinopec) — the PRC’s second largest oil company — on
the New York Stock Exchange this week brought to more than $13 billion the amount
attracted by Beijing so far this year primarily from U.S. investors on global
exchanges.⁽¹⁾ Next
month, that total is scheduled to rise further, perhaps by as much as $1-2 billion, when the latest
Chinese sovereign bond will reportedly be floated in New York.

An article in today’s Washington Post, entitled “China Steps Up
Efforts to Attract Foreign
Capital,” put it rather starkly: “Beijing is courting global equity investors with new vigor as a
source of foreign capital….Chinese leaders hope these will be the first of a slew of
offerings that
could raise tens of billions of dollars in foreign stock markets over several years.”
(Emphasis added.)

The Financial Times today offered an analysis of the larger
context in which the Sinopec
offering has come to market:

Not since the ill-fated ‘red chip’ euphoria of 1996 and 1997, when a
slew of listings
from mainland-backed Hong Kong companies generated a flurry of investor
excitement, has the world seen so much Chinese paper coming to market….Any
hiccups along the way could make Hong Kong’s 1997 red chip crash look like a
mild bout of profit-taking. (Emphasis added.)

The ‘Dark Side’ of Beijing’s Gameplan

These and other published reports validate the warnings that have been
issued for the past four
years by the Center for Security Policy’s William J. Casey Institute via its Capital Markets
Transparency Initiative: Beijing requires unfettered, less-than-transparent access to the
globally dominant U.S. capital markets to sustain the robust level of economic growth the
Communist regime must have if it is to retain power and to underwrite, in at least some
cases, the wrong sorts of state-owned and other enterprises engaged in activities inimical to
U.S. security and other interests.

It does not take an expert in global finance to understand the consequences
of Beijing flooding
over time our markets with multi-billion dollar equity and bond offerings. As the U.S. exposure
to China grows — possibly reaching as much as $100 billion in our equity market in the next
two-to-three years and perhaps $50 billion in our bond market — the threshold Beijing seeks to
reach
to secure “reverse-leverage” on the United States could well be realized.

Specifically, for those who already believe the so-called “China Lobby” in
this country is unduly
influential and able to thwart appropriate U.S. policy responses to egregious security-related
abuses by China (e.g., proliferation, technology theft,⁽²⁾
espionage, support for terrorist-sponsoring states, religious persecution, human rights violations,
etc.), to quote Vice President
Gore, “You ain’t seen nothing yet.”

Imagine, for example, the exponentially increased potential for U.S. security
and other sensitive
policies to be skewed as tens of millions of Americans acquire, literally, a vested financial
interest in the maintenance of cordial relations between the United States and the PRC as the
latter’s investment instruments come to comprise significant parts of their pension funds, mutual
funds, insurance company and other portfolios. This danger can only be intensified to the extent
that the American investors are unable adequately to evaluate beforehand the true identity,
purposes and global activities of those who will deploy such funding.

The FT quotes a Hong Kong-based fund manager from the
Pacific Group who put the matter
succinctly:

“I don’t know why anyone buys these things — they’re just a
bunch of
communists who want to rake in capital and not pay it back,” said Bill
Kaye….”Would you buy a piece of paper from some country when the entity
issuing it is not-for-profit, run by a bunch of bureaucrats with no prior
experience — no one you would hire, with no rule of law or representation on the
board.”

Meanwhile, Back in Washington

In addition to the financial considerations arguing for U.S. investors to steer
clear of the Sinopec
offering, the Washington Post on Sunday (see
attached) joined outraged human rights, national
security and other non-governmental organizations in denouncing the PRC’s efforts to conceal
some of this deal’s strategic implications. These were first laid bare by the
Wall Street Journal’s
Peter Wonacott in an 11 October article that revealed how Sinopec appeared to be playing
an
eleventh-hour “shell game”with its Sudan-related assets prior to the initial public offering in New
York.⁽³⁾

In this respect, it bore certain similarities to the financial sleight-of-hand in
which the China
National Petroleum Company (CNPC) engaged to bring an earlier IPO to the U.S. equity market.
In the attached editorial, the Post alluded to the CNPC caper — which ultimately
involved the
creation of a near-wholly owned subsidiary called PetroChina and wound up costing the
company’s IPO some 70% of its originally anticipated value of roughly $10 billion — noting that
Sinopec represented the “second state energy firm with Sudan links…soon to be
listed on the
stock markets of Hong Kong, New York and London, making it vulnerable to
embarrassing
publicity.” (Emphasis added.)

In fact, the Casey Institute has learned that a veritable flood of e-mails have
been directed to
Securities and Exchange Commission (SEC) Chairman, Arthur Levitt, demanding an explanation
for what many regard as a “material omission” from Sinopec’s SEC filing. In the event of a
divestment campaign against Sinopec of the type so debilitating to the stock price of Canada’s
Talisman Energy Inc. (which, together with CNPC, has substantial operations in Sudan),
stockholders could find themselves taking losses due to a known political risk not
referenced
in the prospectus.

That prospect has been further compounded by the recent revelation by the
Dow Jones Energy
Service that a subsidiary of Sinopec, Shengli Petroleum, was awarded a contract to develop the
energy resources of yet another rogue state: Saddam Hussein’s Iraq. For an undisclosed amount,
Shengli will be allowed to drill some 24 oil wells in Iraq immediately upon the lifting of UN
sanctions — a proposition that can only intensify Beijing’s insistence on that action being taken.

The Bottom Line

These troubling events underscore, yet again, the consequences of the SEC
failing to demand
adequate disclosure of where foreign firms seeking to list in New York are doing business
globally and with whom. While the Casey Institute has consistently opposed capital controls,
undue government intervention and other measures which could impede the free flow of capital
into and out of the United States, we believe that the Congress must engage in an urgent
fact-finding initiative concerning this important new issue area.

Specifically, there should be a blue-ribbon, bipartisan commission
configured to build upon the
groundbreaking work concerning penetration of the U.S. capital markets by the Cox Committee,
the Deutch Commission and the U.S. Commission on International Religious Freedom. The
scope of this rapidly emerging national security and human rights challenge to the Nation can no
longer be ignored by the U.S. government.

In addition, the Securities and Exchange Commission must expand its
disclosure requirements to
include material non-financial concerns of the type described above. And individual
investors,
investment banks, fund-managers and particularly public pension funds should expand their “due
diligence” assessments to include national security, human rights and other appropriate
non-financial considerations so that the American people — six out of ten of whom are now
reportedly
in the capital markets — have the data required to make informed investment decisions.

Failing these measures, IPO opposition and divestment campaigns by
non-governmental
organizations will likely proliferate and intensify, as may legal action — perhaps accompanied by
adverse geopolitical developments (e.g., a China-Taiwan conflict) that have the potential to
wreak havoc on the value of American holdings of such “emerging market” investment
instruments.

– 30 –

1. Sinopec’s stock began trading Wednesday on the New York Stock
Exchange.

2. See articles in today’s Washington Post and
Washington Times concerning the serious and
ongoing efforts by China to divert militarily relevant technologies (such as missile and
supercomputers).

3. See PetroChina Legacy Impacts Upcoming Sinopec IPO,
Underscores Need for Enhanced
Disclosure and Transparency in the U.S. Capital Markets, 13 October 2000, href=”index.jsp?section=papers&code=00-F_49″>No. 00-F49.)