Train Wreck: China I.P.O.s Appear to Jump the Rails

(Washington, D.C.): Today’s Financial Times offers the strongest
indication yet that the
mounting controversy surrounding efforts by China National Petroleum Company and its
subsidiary, PetroChina, is complicating the latter’s efforts to penetrate the U.S. capital markets.
According to the FT, the Securities and Exchange Commission has responded critically to
shifting, and sometimes conflicting, public representations about the end-use of the
proceeds of
an Initial Public Offering by PetroChina now expected to come to market in early March in the
hope of raising $5-7 billion — one of the largest IPOs in New York Stock Exchange history.

More momentous even than the direct effect of the SEC’s inquiries in slowing down the
PetroChina deal is the indirect effect that action is having, in turn, on a growing list of other
Chinese companies who hope to secure largely undisciplined sources of capital from American
mutual and pension funds, life insurance companies and institutional and private investment
portfolios.

Financial Times, 3 February 2000

Chinese IPO Delayed by US Regulator

By Ho Swee Lin

China’s biggest privatization has been held up by extensive scrutiny from the US
securities
regulator, according to bankers arranging the deal. The delay is holding up a number of
other Chinese listing hopefuls.

The Securities and Exchange Commission is believed to be concerned about the
company’s
planned use of proceeds, its accounting standards and its estimation of oil and gas reserves,
which is generous by Western standards.

China National Petroleum Corporation (CNPC), the country’s biggest oil company which is
planning to float its PetroChina unit, said that proceeds would be largely used for retraining and
severance payments. A Chinese official has since said this will not be the case, throwing
investors into further confusion.

The SEC is querying the use of proceeds because it is unusual for funds raised by an issuer to
be
used mostly for severance pay rather than to extend the business. This raises questions
over the
company’s ability to create more value for shareholders, whose interests are of concern to
the SEC, after the listing.

CNPC, which aims to raise up to Dollars 7bn from the issue, plans to slash the workforce
from
1.6m people to 400,000. Besides wages, state companies must also bear the welfare costs of staff
and their families.

Pre-marketing for the issue was expected to begin last month. Now it is unlikely to
kick off
before the end of this month, which will have a costly knock-on effect on China’s growing
pipeline of privatisations.

These include Baosteel Group, a unit of China’s biggest steel company; China Petrochemical
Corporation (Sinopec) and China National Offshore Oil Corporation (CNOOC).

Analysts say the delays could prove costly because without funds the companies are
unable
to carry out extensive restructuring and expansion ahead of the advent of foreign
competition.

China’s impending accession to the World Trade Organisation later this year will throw open
its
domestic markets to foreign competition, beginning with the oil product retailing business.

China’s two largest groups – CNPC and Sinopec – have less than half the country’s oil
retailing
market, analysts say. Sinopec aims to raise USDollars 6bn and CNOOC is believed to be trying
to raise USDollars 2bn, the amount it tried and failed to raise in October.