China Case Analysis The article “PetroChina: International Corporate Governance with Chinese Characteristics” describes the major concerns about PetroChina’s corporate governance when and after it was listed on NYSE and HKSE, which was the first Chinese state-owned enterprise launched IPO overseas. This paper is based on the information provided by the article and will discuss in three aspects: Firstly, why corporate governance was important for China’s SOEs? Secondly, what were the special problems associated with PetroChina’s corporate governance model and what could be done to improve it?
Finally, the postscript: the things I learn from this case study. Part I Corporate governance is important for companies all around the world since it works as an image to investors as well as an instrument to ensure companies’ operational performance. However, corporate governance may serve an even more important role in developing markets. Take China for example, the reasons can be divided into 3 aspects: external market imperfection, internal governance flaws and the urge to push forward economic reform. External market imperfection
The capital market in China was rather weak and imperfect around the time of 2000. Share held by state or corporate persons in former SOEs was forbidden to be traded until 2001. The government was the largest shareholder of all SOEs and controlled the mutual funds and the Securities Regulatory Commission. Banks in China lacked discretion and independent judgment to oversee the operation of their borrowers. All of these made external stakeholder unable to efficiently act as a check against the SOEs. Internal governance flaws
China has a long history of government or party control over companies ever since 1949. Although the government had made notable economic reforms after 1978, which came with a series of administration changed and new laws promulgated, China’s SOEs still suffered poor internal corporate governance: Too much government involvement in companies’ decision making; Managers were appointed for political consideration rather than their capabilities; Supervisory broad performed little function practically, and had no substantial power to challenge directors or managers, etc.
The urge to push forward economic reforms As China prepared to join the WTO, it increasingly became recognized to the importance of market economy. How to save SOEs from inefficient, bulky and in need of money? Going public abroad might the best solution as it not only served as channels to enhance foreign investors’ understanding of China’s corporations but also put more strict requirements on corporate governance which would in turn bring positive benefits to those corporations.
Part II PetroChina’s major problem with its corporate governance model Firstly, CNPC held 90% of PetroChina’s share and had absolute control over it. This led to widespread suspicion of PetroChina’s ability to make independent decisions and protect small shareholders’ benefit. Secondly, PetroChina’s management personnel also served on the board of CNPC and were subjected to government of party’s appointment, which also undermined the independence of PetroChina.
Thirdly, while PetroChina had 3 independent non-executive directors out of its 13 members of the board, 2 of them had close ties to the Chinese government, again weakening the credibility of their original responsibility to act as a check of the business operation. Moreover, although PetroChina provided legal protection of investors within its corporate governance framework, it was practically difficult for foreign investor to be protected because of the huge gap lied between Chinese and Western Countries’ legal system.
While the success of PetroChina’s IPO abroad had paved the way for the rest of China’s SOEs to step on the international capital market, a broader question were raised: What China need to do to improve corporate governance of the SOEs like PetroChina? In my opinion, China need to carry on thorough economic and even political reforms, including reduce government intervention of corporate management, solving corruption problem in government and SOEs, improve corporate governance culture in corporations, and construct a well organize capital market. Postcript
The case “PetroChina” provided by the HKU mainly focus on the problems with PetroChina’s corporate governance model and the following worries of outside investors. This is actually my first experience of business case study and at first I thought we were going to criticize China’s crippled market economy and clumsy state-owned enterprises, yet unexpectedly, it turned out to be a lesson that taught me to how to think critically when invest in such unique company. PetroChina’s corporate governance model did have its endogenous weaknesses but also significant merits.
As it is state-owned, PetroChina suffered problems like low productivity, dual objectives (interest confrontation between the government and minority shareholders), information asymmetry (unwillingness to disclose negative news to shareholders), tunneling operations or corruption, and also principal agent problems. On the other hand, PetroChina benefited much from its SOE identity. It had more accessible natural resources, lower tax rate or other preferential treatments, stronger financial support from banks, and more ensured market for its products. So far, it looks like a draw between the Cons and Pros for investing in PetroChina, right?
However, what investor should worry was that the favorable policies or even the whole political atmosphere might change someday, which would become a large political risk. That risk was hard to be eliminated using portfolio diversification since China was going to become the world’s 2nd largest economy and would have enormous impact on the economy in the rest of the world. In other words, China’s market was too large for investors to avoid and if you want to use risk assets from other areas of the world to diversify the risk from China, the weight of those assets would need to be incredibly too high.
Nevertheless, the most interesting part is that investment may be an art of counterbalance and compromise, when you look at the tremendous market volume and brilliant prospectus of China’s oil and gasoline market. This country has the largest population of 1. 3billion, the second longest highways length of almost 100,000 kilometers and the second largest automobile population of 85 million. And it was growing in average 8% during the years. No one wants to miss the chance to invest in a such economy.
As purely international investors with less concern on political right and wrong or environment issues, driven by profit and price of stocks sitting in the portfolio, should you invest in PetroChina at the time of 2001? The answer lies in whether you can gain high enough profit according to the riskiness level of this investment. And you need to be critical. The world is so diversified and varied and there is no universal standard for corporate governance model. Don’t stick to any doctrine, erase the stereotype and dig into the thing that you want to invest.
