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PetroChina IPO Arrives In U.S. With Weak Pulse

[The Washington Post, April 6, 2000, Thursday, Final Edition. John Pomfret, Washington Post Foreign Service]

BEIJING, April 5, 2000

A Chinese oil company, battered by human rights critics and shifting market sentiment, will limp onto the New York Stock Exchange on Thursday with an initial public offering raising less than half the capital it had sought.

The troubles faced by PetroChina Co.'s $ 2.89 billion listing have prompted China to put the brakes on plans to list some of China's biggest state-owned enterprises. It shows that American investors, once transfixed by the potential of a nation of 1.3 billion consumers, have become wary of China's controversial attempts to use international capital markets to bankroll its moribund state-owned sector. And, it has underscored the power of American labor unions and pension funds to use their political clout and cash to influence the markets.

***A coalition of labor unions, religious groups and Tibetan activists failed in its attempt to block the NYSE listing but claimed to have put a huge dent in the offering. "It's pretty extraordinary what we've accomplished," said Bill Patterson, director of the Office of Investment at the AFL-CIO, which spearheaded the campaign against PetroChina. "There's a new momentum in capital markets."***

However, many analysts said PetroChina was hurt more by the markets, where investors are shying away from Chinese firms in traditional industries. The only exciting China plays now, analysts say, are information technology stocks--such as China's Internet start-ups and a planned listing later this year of China Unicom, the No. 2 telecommunications firm.

"The stock markets want enterprises without the burden of China's old state-owned firms," said Andy Xie, chief economist for Morgan Stanley Asia. "PetroChina, no matter how you cut it, was a tough sell."

PetroChina, the new subsidiary of state-controlled China National Petroleum Co., will open on Thursday in New York, with its American depositary receipts priced at $16.44 each, the low end of the company's predicted range. Each ADR represents 100 common shares.

***Human rights and religious groups had attacked PetroChina because China National Petroleum has an investment in Sudan***. Profits from that investment, they claimed, were funding the Islamic fundamentalist government's war against rebels in the country's largely Christian south.

American unions had charged that the firm's restructuring plans would lead to 1 million layoffs, violations of workers' rights and possible social unrest in China. The Tibet lobby expressed concerns about the impact on the environment in Tibet if PetroChina drilled for oil or laid pipeline there.

When Goldman Sachs Group Inc., the underwriter for PetroChina's IPO, opened its "roadshow" last month to sell the investment, the AFL-CIO answered with its own. Goldman Sachs wheeled out analysts; the AFL-CIO fired back with a Tibetan monk and Harry Wu, a former prisoner in a Chinese labor camp.

A series of large union pension funds, including the TIAA-CREF, a New York-based pension fund and financial services organization, and the California Public Employees' Retirement System, announced they would not buy PetroChina's shares.

"Goldman Sachs tried to pass PetroChina off as a routine investment in the energy market," said the AFL-CIO's Patterson.

PetroChina's efforts were saved at the last minute by a few strategic investors, analysts said. ***BP Amoco PLC offered up to $1 billion*** to take a 20 percent chunk in the offering. In exchange, it won the right to establish a gas-marketing joint venture in eastern China--a major coup. Several Hong Kong firms, apparently seeking to curry favor in Beijing, also signed up to buy millions of shares as the offer flagged.

"PetroChina has been a very grueling process for both the company and the underwriters," said Goldman Sachs's managing director, Paul S. Schapira.

PetroChina's offering comes eight years after China began listing its firms on foreign stock exchanges, at a time when investors are fed up with the perennial promise of China as the next big gold rush.

While Chinese officials trying to sell new offerings encourage the impression that they are using an IPO to privatize their firms, in reality Chinese law demands that up to 70 percent of the company remain in the state's hands.

While Chinese executives tell Western investors that they will protect minority shareholders' rights, no such protection is written into the prospectus.

While Chinese companies speak of adopting Western management techniques and corporate governance, most firms are still ruled by bureaucrats, and managers are often replaced at the whim of a Communist Party functionary.

While Chinese companies claim they will use the new capital to streamline production and turn a profit, there is no way of knowing how much money goes into fly-by-night investments such as karaoke clubs or real estate scams.

"Buying a Chinese stock is like putting money into a black box," said an investment banker in China whose firm is underwriting several Chinese IPOs. "I wouldn't put my money there."

In fact, none of seven investment bankers interviewed for this article said they would invest in the IPOs that their firms are underwriting.

At the heart of this issue is the fundamental difference between how the Chinese government and the West view stock markets.

"In China, the objective of securities markets is to create greater operating efficiencies in state-owned enterprises that continue to be owned by the state," write Carl Walter and Fraser Howie in an upcoming book on China's stock market. Privatization, the authors say, has never been the goal.


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