Working Paper Series

School of Contemporary Chinese Studies China Policy Institute

WORKING PAPER SERIES

The State Business Groups of China’s National Oil and Petrochemical Companies

Tyler Rooker

WP No.2012-01 Working Paper No. 13 December 2013 The state business groups of China’s national oil and petrochemical companies

Abstract

China’s oil and petrochemical industry is led by state-controlled business groups that only fully formed through institutional separation from the state in the late 1990s. This paper probes a group of 31 listed national oil and petrochemical companies in the period from 2007 to 2011. Four areas of exploration are highlighted: post-restructuring consolidation of China’s qiye jituan business groups; related party transactions; related party corporate finance; and the impact of property rights on corporate governance. This paper sheds light on the particular development of businesses in the oil and petrochemical industry in China and reveals directions that China’s big business policy and further restructuring of the state-business interface will take in an evolving socialist market economy. This has implications for government policy in terms of international trade and investment as well as multinational corporations doing business with China.

Key words: business groups, China, oil, SOE restructuring

Tyler Rooker Peking University Institute of Sociology and Anthropology

University of Nottingham School of Contemporary Chinese Studies [email protected]

Publication in the CPI Working Papers series does not imply views thus expressed are endorsed or supported by the China Policy Institute or the School of Contemporary Chinese Studies at the University of Nottingham.

2 Introduction The growth and development of China’s oil and petrochemical industry since the late 1990s is astonishing. It is led by state-controlled business groups that only fully formed through institutional separation from the state at that time. This paper probes a group of 31 domestically-listed (in Shanghai and Shenzhen) national oil and petrochemical companies (NOPCs) in the period from 2007 to 2011. Four areas of exploration are highlighted: post- restructuring consolidation or diversification of China’s qiye jituan1 business groups;2 the nature, direction and amount of related party transactions (RPTs); forms of related party corporate finance; and the impact of property rights on corporate governance. This paper sheds light on the particular development of businesses in the oil and petrochemical industry in China and reveals directions that China’s big business policy and further restructuring of the state-business interface will take in an evolving socialist market economy. The following paper starts from the insight that virtually all oil and petrochemical big businesses circa 2007 listed in China are organized in terms of business groups. Yet the business group nature of NOPCs immediately reveals four areas of exploration. First, in the past fifteen years—since the 1997/8 restructuring and reorganization of the state industrial sector—a major reshuffling of industrial and corporate organization in the oil and petrochemical industry is apparent. Second, with this organizational form, the volume of RPTs within the business group is a proxy for the extent to which market-supporting institutions, as well as multi-divisional versus business group firms, have developed in China during this time frame. Third, related party finance—consisting of both internal reallocations of capital within the group and member firms acting on behalf of other group firms to access capital from outside the group—signals the direction of corporate finance and capital market development for national oil and petrochemical companies. Fourth, rethinking property rights, the legal/market nexus that continues to elicit debate, extends debate on the corporate governance of business groups and NOPCs in particular. While the companies reviewed in this paper are some of the most state-owned, most important and most security related companies in China, it remains unclear as to the extent to which they are following the pattern of other non-Western corporate organizational forms throughout the world, as well as those of big businesses throughout China.

Research questions ‘Rationalization’ of oil and petrochemical industry The idea of China ‘transitioning’ from a planned, command or socialist economy is widespread. Yet most scholars either omit the endpoint to which it is transitioning, or

1 Qiye jituan is the term for China’s form of business groups, and thus these two terms are used interchangeably in this paper. 2 The theory of business groups has become part of established economic theory (Granovetter 1994; Leff 1978). Its basic issues and tensions are important to facilitate the empirical discussion below. The predominance of business groups worldwide—outside the U.S. and U.K.—has been well established (La Porta et al. 1999; Khanna and Yafeh 2007). They consist of a group of legally independent companies engaged in diverse industries that are coordinated by a central authority, whether that be a family, an interlocking directorate (board of directors or presidents drawn from each of the group’s companies) or the state. Most notable are the zaibatsu of pre-WWII Japan, keiretsu of contemporary Japan, chaebol of South Korea and grupos economicos of Latin America (see Carney 2008; Colpon et al. 2010). By utilizing intergroup exchanges, financing, project execution capabilities, “big push” simultaneous development of multiple, connected industries, and risk sharing and mutual insurance, business groups facilitate economic growth and national development in the absence of market institutions that perform these functions in the West (Leff 1978; Amsden 1989; Amsden and Hikino 1994; Morck and Nakamura 2007; Khanna and Pelapu 1997). 3 simply supply (Western) capitalism or a market economy. China itself claims, and has claimed for two decades, to be a socialist market economy, with ‘reform’, an endless, continuous process, occurring across multiple industries, system and policies. This paper starts from the radical restructuring of state-owned enterprises that was pushed nationally for the first time in 1997/8. Various experiments in decentralization of management (Morris et al. 2002; Cao 2000), trials of business group functions (Sutherland 2001), and closing down of industrial ministries (Garnault et al. 2005; on the oil and petrochemical industry in particular, Lin 2008) were a prelude to the radical changes pushed nationwide for the first time in 1997/8 (Naughton 2008; Oi 2011; Chiu and Lewis 2006). Oi (2011) points to the 15th Chinese Communist Party Congress in 1997 as the official start to a radical wave, while Oi and Han (2011: 22) declare the ‘late 1990s was the watershed period in China’s corporate restructuring when the nationwide pattern and speed of reform changed markedly.’ Brødsgaard (2012) explicitly names Zhu Rongji (echoing the more general work of Ji 1998, Steinfeld 1998 and Oi 2011 on restructuring of state-owned enterprises) and the 1998 administrative reform as crucial for NOPCs. Yet while the organizational form of the business group—known as the qiye jituan—emerged in the late 1980s and early 1990s (Keister 2000; Sutherland 2001; Hahn and Lee 2006),3 post 1997/8 brought a wave of reorganization (chongzu) and restructuring (gaizhi). Whether referred to as privatization, securitization or corporatization, SOEs nationwide transformed in earnest only after 1997/8 (Morris et al. 2002; Cao 2000; Green and Liu 2005).4 Finally, it was only at this point that the main players in the oil and petrochemical industry were restructured and reorganized.5 Since that time, former SOEs have come to rule not only China but make up an increasingly significant part of the Global Fortune 500. The institutional creation of the state-owned assets and supervision commission (SASAC) for central state-owned enterprises (CSOEs) in 2003, and its subsequent cascading to the provincial, municipal, prefectural, and district levels for local state-owned enterprises (LSOEs), underscored the institutional change that occurred in industrial organization and corporate form of state-owned enterprises. The consequences of institutionalizing state- ownership of business assets, and their separation, reorganization and listing, has had a profound impact on the development and structure of large business groups in the past decade.6 The qiye jituan are China’s corporate form of business groups that mirrors keiretsu in Japan, chaebol in South Korea and other national business groups chronicled throughout the

3 Genealogists trace the business group reform back to First Auto Works in mid-1980s (Sutherland 2001; Keister 2000; Hahn and Lee 2006). These scholars point to a group of 120 “national champions” or “trail groups” that are the basis of contemporary business groups in China, despite all three oil and petrochemical titans being left out of the trial groups. 4 Smyth (2000: 722) notes that in 1997 alone 3,000 enterprises were merged and 15.5 billion yuan in state assets was reallocated. 5 Lin (2008) argues insightfully that global economic—oil price and Asian financial—crises forced Sinopec and CNPC subsidiaries to agree to restructuring in 1997/8. But the overall restructuring across all SOEs nationwide implies a more compelling “wind” that would have forced the issue sooner or later. 6 Brødsgaard (2012), citing Lin (2003), notes that as a consequence of this overall (restructuring in oil and gas industry), local refineries and petrochemical manufacturers as well as domestic wholesalers and retailers were wiped out. Business groups consolidated power that previously had been much more regionally based. While the party’s influence was maintained through control of the appointment of CEOs and presidents of the most important companies, and the scope of business group control limited by SASAC, a fundamental reorganization of state, business and society had taken place. But this process was not a smooth exertion of central power over multiple, regional business groups with their own local powers and stakes: In one case, “it took extensive negotiations before the Shanghai city government finally agreed to the merger of the firms” (Hahn and Lee 2006: 215). This oversight of the hysteresis of development is what leads scholars such as Paik et al. (2007) to view China’s oil business groups as making decisions based on confluence of interests between government bodies top-down, erroneously giving the sense that NOPCs are not diversified beyond PetroChina, Sinopec and CNOOC. 4 world (Hahn and Lee 2006). The oil and petrochemical industry is also strategically protected by the Chinese government: beyond setting price regimes for oil and petrochemical products, it only has gradually liberalized tariffs on imports, only allowed imports to designated companies, prohibited free formation of joint ventures with foreign oil and petrochemical companies, and restricted availability of exploration and production licenses (Wu 2002). 7 The organizational structure of NOPCs is dominated by state-owned business group enterprises, particularly Sinopec Group, CNPC and CNOOC Group, and is identified as a pillar industry of the Chinese economy (Andrews-Speed 2004). There are various entry barriers to both foreign and domestic enterprises and prices are set by government mechanism, though some reform of price-setting began in 1998 (Zhang 2004) to make set price more accurately reflect global oil market prices. Integrating both radical restructuring and reorganization in 1997/8 with business groups as primary organizational form of business yields questions against which research data can be tested; namely, the extent to which China’s listed NOPCs have consolidated their groups into a single, multidivisional firm with majority outside ownership mirroring Western managerial capitalist forms of corporate organization (Chandler 1977, 1990). This generates a research question: what changes in industrial structure and corporate organization of NOPC business groups have occurred since the 1997/8 restructuring and reorganization?

Role of RPTs in business groups ‘Related party transactions’ (guanlianfang jiaoyi; RPTs) in corporate annual reports are defined as exchanges between a group’s listed company and another company in the business group. NOPCs that engage in regular RPTs, both purchases and sales, provide a proxy for gauging either the development of market-supporting institutions (or the declining imperfection of markets) or the entrenchment of intra-group transactions despite the changing external environment in China (Carney et al. 2009). Lu et al. (2004) study RPTs, distinguishing between related party purchases and related party sales, of China listed firms in 2001 and find that related party sales are more important to control product distribution. Yeh et al. (2009) and Berkman et al. (2010) use RPTs as a direct proxy for corporate governance (or lack thereof). As Cheung et al. (2009) also show, analyzing RPTs in China’s business groups allows understanding of the degree to which listed companies are supported by these transactions, i.e. that transactions are valued above or below external rates, and thus represent either a premium paid by listed company or a discount enjoyed by it. Jian and Wong (2004) find that RPTs minimize transaction costs and help manage earnings between different group firms. RPTs allow the diversion of corporate wealth into other uses by the business group (Jian and Xu 2012). Despite their importance to NOPC corporate organization and operation, related party transaction are often only viewed as either propping up or tunnelling away the listed firm’s assets and profits (Jian and Wong 2010; Williams and Taylor 2013). In this paper, NOPC groups’ internal or RPTs measure the extent of market institution internalization. Over time, increasing volume and ratio of RPTs indicates worsening market institutional environment, while decreasing volume and ratio indicates improving market

7 Prior to 1997-8 restructuring, prices for oil, gas and petroleum products are set by the state without reference to global oil and petrochemical prices. Different ministries—the Ministry of Oil Industry and the Ministry of Chemicals Industry— oversaw all production and sale, while local governments, from the provincial to the city and district, ran the distribution networks for these ministries, in a typical tiao-kuai (vertical oversight and regional integration) fashion (Zhang 2004; Hahn and Lee 2006; Lin 2008). 5 institutions. Increased RPTs also demonstrate a trend towards business group organization rather than the multi-divisional firm of the West. This generates a second research question: how have the volume, ratio and direction of RPTs changed for NOPCs between 2007 and 2011?

Related party finance Prior to the late 1990s, SOEs viewed banks as simply a different institution for dispersal of state resources—rather than direct budgetary allocations, loans underwritten by banks fulfilled the state’s resource allocation purposes. As with the reform of the state-owned industrial sector above, however, this changed radically in the late 1990s with a bank bailout, restructuring (and listing) of banks, hardening of loan requirements and payments and institution creation. The Asian Financial Crisis and unsustainable debt ratios were exogenous factors forcing policy changes to corporate finance. Although figures vary, triangular debt8 and non-performing loans (NPLs) reached massive ratios by 1996, with some sources claiming as much as 100% of GDP on the eve of radical reorganization (Cao 2000; Sun and Tong 2003).9 The 1999 bank recapitalization—in which bad debt was hived off bank balance sheets, liquidity was injected, and four asset management companies (AMCs) were formed to try to recover bad bank debt—signaled another institutional intervention as part of the new package of reorganization and restructuring measures begun in 1997-8. While existing debt was written off and triangular debt retired through debt-equity swaps and legal person shares, newly organized business groups would no longer have access to soft loans with easy repayment terms (Morris et al 2002). Yet it is still true that corporate finance comes mostly from loans at state-controlled banks, and that these loans are mostly made to state-controlled businesses accessed through political connections (Su 2005; Jian and Xu 2012). Besides these external financing options, business groups have internal financing options such as ‘finance companies’ (caiwu gongsi) that take group subsidiaries’ deposits, make loans and provide credit for business operations that otherwise could not take place (Keister 2000).10 Other internal financing mechanisms include direct loans from controlling shareholders or shareholders’ subsidiaries, loan guarantees and ‘informal’ finance, such as net receivables and net other receivables. They represent business goods and services already sold or purchased, respectively, but not yet paid for. While these are standard accounting measures in the balance sheets of listed companies to account for assets and liabilities, they take a different valence in the context of related parties (Jian and Wong 2004). In particular, ‘other’ accounts receivable (qita yingshou kuan) refers to transactions where capital is due to be paid to the

8 Triangular debt refers to, for example, accounts receivable by company A from company B, who has accounts receivable from company C, who in turn has accounts receivable from company A. Since each waits for the other to pay before paying its own creditors, all the debts remain outstanding. See Steinfeld (1998). 9 Naughton (2007) claims one-third of GDP in NPLs alone. 10 Sources differ, but somewhere between 80 and 150 business group finance companies continue to exist today. According to the website for the China National Association of Finance Companies (www.cnafc.org, accessed 15 January, 2013), its members include some 150 companies. The China Banking Regulatory Commission (CBRC), the government agency charged with oversight of business group finance companies, lists 111 companies on its website (www.cbrc.gov.cn, accessed 15 January, 2013). At the end of 2009, there were reportedly 91 business group finance companies in operation, of which 87 had total assets of 1.26 trillion (Lianhe Credit 2010). Then at the end of 2010, Lianhe Credit (2011) reported 107 finance companies were in operation. According to China Petroleum Finance’s (2009) analysis, there were 81 business group finance companies in China at the end of 2007, 78 of which had assets of 853 billion yuan. Finance companies, following the China Banking Regulatory Commission’s issuance (in 2004) of “Administrative Measures for Business Group Finance Companies”, expanded from simply deposit and loan activities to credit, clearing, central fund management, wealth management and consulting. 6 listed company outside ordinary business operations (Jiang et al. 2010), 11 which again can be from a related party. The scope of different financial and capital strategies between the listed company and the business group of which it is a part are quite broad. Increased NOPC access to capital markets and gradual withdrawal from internal, business group sources of capital indicates external capital markets and corporate financial institutions are growing in importance. The corollary is that debt-based and business group related party finance are increasing and thus institutions supporting capital market development for NOPCs are deteriorating or ineffective. Hence the third research question: over the period 2007 to 2011, how has NOPC financing transformed either internally or externally in response to group-external, financial market institutional development?

Corporate governance In classical economic reasoning, Coase (1958; 1960) ruminates on the role of government regulation, the institutions of law and the functioning of the market pricing system. Initial legal delimitation of property rights has been developed into a “bundle” of property rights (Demsetz 1967; Aichian and Demsetz 1973), specifying ownership, use, disposal and enforcement as legal rights accruing to particular parties.12 With this underlying conception, Shliefer and Vishny’s (1997) comprehensive and influential survey explicitly categorizes “good” and “bad” systems of corporate governance through different regimes of property rights. Perhaps predictably, they find the most fault with state ownership. With Coasian influence, neoliberal market scholars find only negative consequences to state ownership of businesses in terms of corporate governance. Underlying their multiple analyses is the assumption that the market pricing system and market-external institutions all function in the same way. For example, Guthrie (Guthrie et al. 2009) elides any gap between Western and China’s governance systems by simply stating that private and state property rights in China are following a model set by Western MNCs and JVs wherein market transactions and disputes are based on legal-rational system learned by aping Western market behavior. Berkman et al.(Forthcoming) claim that private enterprise is the only system that can guarantee malfeasance does not arise through lack of corporate governance, a fact illustrated by better stock price performance. Walter (2011; Howie and Walter 2006) states that non- tradable shares distort the stock market and make it ineffective in disciplining corporate behaviour due to lack of institutions with similar powers to Western counterparts. Yeh et al. (2009) and Zheng and Kim (2011) note simply that any related party transactions mean ownership and property rights are unclear, and corporate governance is impossible. All these scholars take for granted the presence and functioning of institutions that facilitate, monitor, and enforce regimes of property rights and corporate governance—a normalizing assumption based on the Western telos of development. They share what Amsden (1989) has described as singular assumptions embodied in the psycho-social world of finance. The specific psycho-social assumptions that underlie financial markets and analysis are so specific and unique that it is curious that their extension outside the particular cultural

11 “Other receivables” indicates outstanding amounts owed to the company outside of trade receivables, i.e. accounts receivable and notes receivable. Other receivables can include loans, wage advances, packaging rental, refundable deposits, and petty cash. 12 There are certainly others, and the debate in the West over property such as the environment, security and health is certainly not resolved. In comparative context, the idea of a “right to profit from” is usually assumed in Western theorization since this tenet underlies neoclassical markets and Western capitalism. In China, the bundle of property rights explicitly defined in the 2007 Property Rights Law are the rights to: possess (zhanyou), use (shiyong), profit from (shouyi), dispose of (chufen), and exclude others from (paichu) property. 7 contexts of the U.S. and U.K. occurs at all (La Porta et al. 1999; Amsden 1989). Even a scholar such as Chandler (1990: 626) has questioned why the masters of finance should also be masters of the corporate world, and whether there even should be such a thing as a market for corporate control. Business groups necessitate a different tact on corporate governance. The classic separation of principal investors (financiers) from agents (business executives and managers) of Berle and Means (1932) is not applicable to business groups, where a central authority unifies majority ownership across multiple listed companies with their management by delegated authorities. The central authority associated with many of China’s business groups, parent company, SASAC and ultimately the state, is often negatively identified as a barrier preventing listed companies from responding to forces from the financial market (Morck et al. 2005). The lack of a market for corporate control, i.e. merger or takeover activity, means that capital markets do not serve the function of disciplining management (Clark 2003). Yet the introduction of business group parent firms as intermediaries between the state and listed company provides a layer of separation from government intervention in decision making, reducing political ‘cost’ and empowering managers (Fan et al. 2007), while shielding them from the grabbing hand of the state (Su 2005). Business groups fill an institutional void or create institutional separation in terms of making corporate governance a business group affair, even if the majority of assets are traceable back to the state. The extent that NOPCs, over the period 2007 to 2011, are moving towards Western capitalist institutions would be reflected in four results: the state as an ultimate controlling shareholder and its shareholding percentage of NOPCs will be decreasing, minority shareholder influence on recurring and one-off RPTs will be increasing, the overall amount of RPTs will be decreasing and takeovers or bankruptcy will be evident. On the contrary, if blocks of shares remain in the state’s hands, RPTs continue, and shareholder activism and takeover threats are suppressed, this is evidence that market institutions are not emerging or are even declining over the period. Thus, the final research question: how have NOPCs from 2007 to 2011 evolved in terms of property rights and institutions of corporate governance?

Method The selection of NOPCs for this paper comes from the Shenzhen (SZSE) and Shanghai (SSE) A-share bourses. Some of the companies are listed under the SSE ‘Energy Industry Index’ and the SZSE ‘Petrochemical, Plastic and Rubber Index’. Others were found by consulting stock market information websites, including Sina Finance, East Money and Emoney,13 and securities company websites for specialized oil and petrochemical industry ‘boards’. The selection was limited to companies that had listed by 2007 so that a full five years of annual reports are available to compare. In addition, companies connected to the three major NOPCs or large industry players in the petroleum industry are included, for example Jichai Diesel Engine Company Limited which is 60% held by CNPC, SinoChem International Corporation majority held by SinoChem Ltd14 and Nanjing Tanker Corporation, controlled by SinoTrans-CSC.15

13 The websites that maintain their individual petroleum or petrochemical “concept boards” (gainian bankuai) are finance.sina.com.cn, quote.eastmoney.com and www.emoney.cn, respectively. Sites were accessed in November and December, 2012. 14 SinoChem International’s 2011 annual report claims SinoChem Ltd is “one of the four large oil companies of China”. 15 The majority of listed company’s revenue comes from oil shipping. 8 In this paper, RPTs for the 31 NOPCs are found through reviewing the 2007 to 2011 annual reports of companies, including both business and non-business related costs and sales, which are required to be declared. Financing among the NOPCs is surveyed by analyzing leverage, loans, loan guarantees, accounts receivable and other accounts receivables from the annual reports. To understand corporate finance of the NOPCs, the presence or absence of a finance company within the business group has already been noted. Finally, property rights and governance are explored by reflecting both on the one and a half decades of NOPC development since restructuring and reorganization and by reviewing several case studies of individual NOPCs in terms of property rights.

Data analysis Ownership All business groups possess varying amounts of block share ownership by their controlling shareholder: for the CSOEs, they control an average of over 48% of the shares, though the majority have well over 50% of shares. For the LSOEs, controlling shareholders exert a similar amount of dominance, with only one company, owned by a municipal district in the Xinjiang city of Karamay, having less than 50%. Finally, private companies’ controlling shareholders average ownership of 22% of all shares, though 3 have less than 20%. From 2007 to 2011, the population of companies increased operating revenue from 2.19 trillion yuan to 4.81 trillion yuan, an average annual growth rate of 23.85%. The majority of this increase in revenue came from the growth of PetroChina and Sinopec, who together grew from a combined 2.04 trillion yuan to 4.51 trillion yuan, with an average growth rate of 24.21%. Reflecting this dominance by the two industry titans, the CSOEs in the group averaged growth of 23.91%, ahead of the LSOEs at 18.02% and private enterprises with 13.57%. Operating costs for all enterprises increased faster than revenues, growing at an average annual rate of 26.17%, again led by PetroChina and Sinopec who had average growth in operating costs of 26.91%. CNPC and Sinopec Group The organization of CNPC, Sinopec Group and CNOOC Group assets into PetroChina, Sinopec and CNOOC and their subsequent listing on domestic and international stock markets is well known (Zhang 2004; Lin 2008; Wu 2002; Nolan 2001). Of more significance for this paper is the subsequent period of NOPC development from 2001 to 2011, that forms the backdrop for the data under study. The complete list of companies now removed from trading on domestic stock markets during this period is given in Appendix 3. Some eighteen listed companies were disposed of by CNPC/PetroChina and Sinopec Group/Sinopec in the period 2002-2009, with the buybacks from the stock market concentrated in 2005-6. In addition to PetroChina, CNPC, the parent of the business group, still holds controlling ownership of three other listed companies, while Sinopec Group and Sinopec together control five other listed companies (see Appendix 1). CNPC has 3.03 trillion yuan in assets in 2011, up from 2.63 trillion yuan in 2010 and 2.22 trillion yuan in 2009. Its debt-to-asset ratios in these years were 14.78%, 14.99% and 14.51%, respectively. In terms of ROE and ROA, CNPC averages 7.25% and 20.97% over the three year period. According to Lianhe Credit (2012a: 4), CNPC has 78 enterprises designated as second-grade subsidiaries that it includes in its consolidated income sheet. In 2011, PetroChina’s assets amounted to only 63.33% of CNPC’s assets, but provided 84.15% of operating income (see Chart). This is the lowest ratio over the 5-year period, declining

9 slowly but steadily from 66.77%. While the pace of change is slower than in the case of Sinopec Limited and Sinopec Group below, there is still an indication that CNPC’s asset growth is outpacing PetroChina, at a rate of 17.9% versus 15.9%, respectively.

CNPC versus PetroChina, 2011 Operating Operating Assets Liabilities Debt-Asset Income Cost ROE ROA (bn RMB) (bn RMB) Ratio (bn RMB) (bn RMB) CNPC 3,027.88 1,327.19 43.83% 2,381.28 1,716.45 7.68% 21.96%

PetroChina 1,917.53 834.96 43.54% 2,003.84 1,425.28 13.60% 30.17% Source: Lianhe Credit (2012a), PetroChina 2011 Annual Report.

Sinopec Limited accounts for 64.75% of Sinopec Group’s total assets, but provided a much larger percentage - 98.12% - of the Group’s operating income. The percentage of assets held in Sinopec Limited is also declining, from a high in 2007 of 73.31%, and dropping each successive year by 2-3%. This indicates that, as the assets of Sinopec Limited are growing, those of Sinopec Group are growing even faster—11.0% versus 15.1% annually.

Sinopec Group versus Sinopec Limited, 2011 Operating Operating Assets Liabilities Debt-Asset Income Cost ROE ROA (bn RMB) (bn RMB) Ratio (bn RMB) (bn RMB) Group 1745.307 1022.965 58.61% 2551.951 2087.161 11.51% 26.63%

Limited 1,130 621 43.54% 2,506 2,093.20 15.93% 30.17% Source: Lianhe Credit (2012b), Sinopec 2011 Annual Report.

Sinopec Limited kicked off the reorganization of its listed subsidiaries by selling its entire controlling interest (57.6%) in Hubei Xinghua to the State Development and Investment Corporation (SDIC) for 539 million yuan, a little over two years after these shares were transferred to Sinopec from Sinopec Group’s Jingmen refinery lubricants and paraffin wax base in the central south area of China (February, 2000). As for PetroChina and CNPC, they began their consolidation and reorganization of the oil and petrochemical industry in May, 2002. Petroleum Longchang (Long Champ), a Shanghai-based national oil pipeline operator, which was 35.9% owned by CNPC Pipeline Bureau, sold its share of numerous assets to PetroChina for 457 million yuan. In addition to sales and asset swaps, PetroChina and Sinopec Limited engaged in a number of share buybacks or ‘privatizations’ of listed companies, mostly in 2005-6. PetroChina’s buyback strategy came into force in late 2005 when it issued takeover bids totaling 6.15 billion yuan to acquire four listed companies: Jilin Petrochemical, Jinzhou Petrochemical and Liaohe Oil Field (Xu 2006). Sinopec began the exercise in early 2006, issuing bids for outstanding shares of Qilu Petrochemical, Yangzi Petrochemical, Zhongyuan Oil and Gas and Daming Oil in the amount of 14.3 billion yuan (An 2006). The implementation of this mass ‘privatization’ was tested out in years prior. Sinopec, for

10 example, had initiated the consolidation of Yanshan Petrochemical,16 listed in Hong Kong, in late 2004, and Zhenhai Refinery, also in Hong Kong, in late 2005, with the deals costing 3.85 billion HKD and 7.67 billion HKD, respectively.

RPTs In 2007, NOPCs had approximately 11% of all operating revenue and 22% of all operating cost arising from RPTs. When Sinopec Limited (with 12% of both revenue and cost coming from related parties) and PetroChina (with 6% and 36%), are excluded, these percentages rise to 26% and 44%. This indicates a much higher amount of RPTs in the oil and petrochemical industry outside the two oligopolistic players. Yet if the figures are calculated excluding not only Sinopec Limited and PetroChina but also their related affiliates,17 the numbers are 19% for related party sales and 13% for related party costs. Thus Sinopec Limited and PetroChina affiliates rely to a much larger extent on supplies and sales channels from these two, while NOPCs unrelated to Sinopec Limited and PetroChina have more reliance on their group affiliates for sales channels than supplies—perhaps understandable, if oil and petrochemical inputs are coming from Sinopec and PetroChina. Sales represents a downstream orientation for NOPCs. The higher ratios of related party purchases versus sales can be understood if the supply of oil is dominated by Sinopec Limited and PetroChina, as their listed affiliates have little choice but to purchase upstream inputs from their parent or its affiliates. Indeed, all of the companies with more than 30% of operating cost coming from related party purchases were either CNPC, Sinopec Group or Sinopec Limited affiliates. In 2011, the weighted average ratios of related party sales and purchases to total operating revenue and cost for the entire group of NOPCs are 10% and 16%, respectively. When Sinopec Limited, with 12% related sales and 10% related purchases, and PetroChina, with 5% and 22%, are excluded, the weighted averages for the group are 29% and 38%. Excluding all of Sinopec Group and CNPC affiliates brings these averages down to 19% and 26%. Again, the high figures when excluding Sinopec and PetroChina but not their affiliates can be understood since the remaining population of NOPCs includes important affiliates, such as Shanghai Petrochemical and Yueyang Xingchang (part of Sinopec Limited and Sinopec Group, respectively), that rely on the group for inputs of crude oil and comprehensive services as well as output channels for sales. What is not readily apparent is why the ratio of related party purchases to operating cost has risen so dramatically. PetroChina has reduced its reliance on CNPC affiliates to 22% from 36% in 2007, which to some extent explains the overall figure for the group, but excluding Sinopec Group and CNPC affiliates gives a rise in the ratio of related party purchases to operating cost—to 26% from 13% in 2007. One conclusion is that for this group of domestically-listed NOPCs, their development over the past five years has led to an increasing reliance on other companies within their own business groups rather than the external market, for a range of inputs, services and sales outlets. This would support the conclusion that market-supporting institutions are declining in China. Thus increasing inputs from related party suppliers seems to be an important trend, though importantly reversed by both Sinopec Limited and PetroChina. While the

16 This was the first time any Hong Kong-listed company was “privatized”. 17 The related affiliates of Sinopec Limited are Yueyang Xingchang, Taishan Petroleum, Shanghai Petrochemical, Yizheng Chemical Fibre and Sichuan Meifeng. The related affiliates of PetroChina are Daqing Huake, Kingdream PLC and Jichai Diesel Engine. 11 interpretation is mixed, it is clear that for important central state NOPCs such as Liaotong Chemical, Yueyang Xingchang, Daqing Huake, Yizheng Chemical Fibre and Shanghai Petrochemical, tapping related party suppliers is increasingly the strategy of choice.

Corporate Finance Finance Companies and Business Group Loans Over the five year period, debt to asset ratios increased from 42.44% to 46.01% (see Appendix 2). Also apparent in the data is a debt to asset ratio that increased some 200% for Sinopec during this period. The CSOEs with finance companies include CNOOC Finance Company, Petroleum Finance Company and Sinopec Finance Company, as well as SinoChem Finance Company, Norinco Finance Company, SinoTrans-CSC Finance Company, and ChemChina Finance Company. These finance companies are all controlled by the group parent company, though the listed company may own shares of them. The final piece of the corporate finance picture explored here is loans or guarantees for related parties and loans, guarantees and short-term borrowing from related parties. In 2007, PetroChina had a total of 46.7 billion yuan in loans, 24.4 billion yuan of which came from the CNPC finance company China Petroleum Finance. One of these loans, for 19.9 billion yuan, originated in November, 2008, and is for a period until April 2032; the other, for 4.5 billion yuan, is until September, 2020. Both are charged a band of interest rates around 5%. In 2007, Jichai Diesel reported that it obtained short-term loans of an addition 150 million yuan for a total of 500 million yuan from China Petroleum Finance. Jichai Diesel paid a 1 million yuan ‘guarantee fee’ to its controlling shareholder for the loan in 2007. Another controlling shareholder, Jichai Diesel Factory provided guarantees for Jichai Diesel’s borrowing of close to 190 million yuan in loans. Sinopec Limited had 11.9 billion yuan in short-term loans from Sinopec Group and its affiliates in 2011. The total amount listed at the end of the report is 53.0 billion yuan. Sinopec Limited provided 782 million yuan in guarantees for its joint and cooperatively operated companies, versus a total of 4.5 billion yuan in guarantees. For loans maturing in less than one year, PetroChina had 37.9 billion yuan worth that were guaranteed by CNPC and its affiliates. It had 113 billion yuan in long-term loans, at least 40 billion yuan of which came from PetroChina Finance. By the end of 2011, PetroChina had borrowed 134.2 billion yuan from CNPC and its affiliates. Shanghai Petrochemical in 2011 borrowed 4.8 billion yuan from Sinopec Finance Company. It began listing Sinopec Finance as a related party in 2008, and noted loans of 230 million yuan from this company in 2009. A loan of 5.2 billion yuan was made by Sinopec Finance to Shanghai Petrochemical in 2010. It lists a single loan guarantee of 200 million yuan for a related subsidiary.

Outstanding Accounts Examining informal means of finance in 2007, the group of domestically-listed NOPCs had an average of 457 million yuan in related party receivables and 1.69 billion yuan in related party payables in 2007. This indicates a net flow of capital into listed vehicles from related parties. The influence of Sinopec Limited and PetroChina on this average is heavy. Sinopec had 3.99 billion yuan in receivables and 5.47 billion yuan in payables to related parties, while PetroChina had 4.09 billion yuan in receivables and 29.5 billion yuan in payables— topping the ranks of both financial categories. 25 billion yuan in payables to PetroChina indicates that CNPC is directing cash into propping PetroChina away from two smaller

12 companies, though the absolute amount—totalling less than 50 million yuan—is likely of little importance. Related party other receivables differ from related party receivables in being classified as involving debts arising from transactions outside the scope of a company’s main business. Sinopec Limited and PetroChina again lead the list with 6.8 billion yuan and 4.7 billion yuan, amounting to less than 1% of operating income for 2007, but accounting for respectively 57% and 30% of all other receivables. This large ratio of other receivables arising from related parties - averaging 54% but ranging from 7% to 91% for companies with more than 1.5 million yuan outstanding in this category—indicates that, no matter the nature of transactions with related parties outside of main business, the flow of capital outward is strongly oriented to related parties. This contrasts with the analysis of business-related receivables and payables above. A final observation is that there are extensive other receivables for firms such as Nanjing Tanker, Shanghai Petrochemical, Sinochem International, COSL and Shangdong Haihua, all of which have between 200 million and 450 million yuan in other receivables. In 2011 the NOPCs averaged 1.07 billion yuan in receivables and 2.7 billion yuan in payables to related parties. Sinopec Limited and PetroChina lead the companies in total amount of related party receivables and payables, with 15.4 billion yuan and 10.9 billion yuan in receivables and 64.0 billion yuan and 9.8 billion yuan in payables, respectively. CNOOC’s Offshore Oil Engineering and COSL rank highest among related party receivables with 21% and 18% of revenue. The two companies have a much lower ratio of payables to total operating income, at 3% and 5%, respectively. For Sinopec Limited and PetroChina, none of their related party receivables or payables account for more than 1% of total operating revenue and cost, with the exception of PetroChina’s payables which are 5% of cost. While only slightly increasing from the previous year when it had 63.8 billion yuan in payables, PetroChina has more than doubled the amount it owes to related parties. It has added 10 billion yuan or more in each of the years 2008, 2009 and 2010, suggesting that CNPC is deploying this tactic to keep more cash inside PetroChina. Sinopec Limited is also worthy of mention: shifting from 1.5 billion yuan in net payables in 2007 to 5.6 billion yuan in receivables in 2011. Of the five LSOEs, Yanchang Petrochemical Engineering’s net receivables have skyrocketed, growing from 4.6 million yuan in 2007 to over 1 billion yuan in 2011. In part, this is due to escalating trade with its parent company, Shaanxi Yanchang Petroleum Group, as receivables have increased from 200 million yuan in 2008 to 250 million yuan in 2009, and to 580 million yuan in 2010. The large and increasing balance indicates that other group members are using Yanchang as a source of temporary financing and even outright appropriation of funds. The largest amount of other receivables in 2011 was from Sinopec, who had 1.5 billion yuan. This is predictably followed by PetroChina’s 552 million yuan. Yet these numbers have fallen significantly from 2007, and related party other receivables make up only 21% and 6% of all other receivables for Sinopec and PetroChina, respectively. Excluding Sinopec and PetroChina yields an average of 4.4 million yuan per company in related party other receivables, down from an average of 8.3 million yuan in 2007, pointing to decreasing influence for this informal financing mechanism.

13 Case Studies Taishan Oil This company is unique among the subsidiaries of Sinopec Group as it is only minority owned (24.57%) by Sinopec Limited. Taishan Oil specializes in selling retail oil, mainly diesel and gasoline, to gas stations in the Taian, Qingdao and Qufu cities of Shandong Province. In 2011 it sold over 10,000 barrels per day. Prior to 2010, 74 to 90% of its annual operating expenses came from related party purchases. By 2011 RPTs dropped to zero. In May, 2009, at the board of directors meeting, Taishan Oil decided to modify its terms of account settlement by using regular banks and withdrew all 5.5 million yuan of its deposits and cancelled its account with Sinopec Finance. On May 12, 2010, at the annual shareholders meeting, the ‘Motion Concerning 2010 Regular Related Party Trading’ was rejected, ending RPTs with Sinopec. Shareholders interviewed at the time emphasized dissatisfaction with company performance, and desire for Taishan Oil to be restructured or ‘privatized’, as had been done with other Sinopec Limited subsidiaries earlier (see discussion above; Qian and Sun 2010; Li 2010). In 2011, with zero RPTs, Taishan increased its revenue from 3.1 billion yuan in the previous year to 3.9 billion yuan , compared to 2.8 billion yuan in 2007. The Taishan case represents the protection of minority shareholders through blocking a potentially expropriatory related party purchase agreement, while its continued profitability shows that market mechanisms external to the group function sufficiently well to ensure the company can survive, and even prosper, without group support.

Liaotong Chemicals Liaoning Huajin Tongda Chemicals Company Limited is one of nine listed companies in the Norinco Group,18 which holds 51% of shares through a 60% stake of North Huajin Chemical Industries Group. Its growth rate over the 2007 to 2011 period is astonishing, with revenue growing from 3.4 billion yuan to 37.6 billion yuan. In 2011, it had the highest percentage, 91.85%, of purchases from related parties over total costs, buying almost six times the percentage of operating cost from related parties that it did in 2007. In 2008, Liaotong Chemical began to list ‘Norinco Finance’ as a related party. That is because, in 2008, it was floated four19 massive, long-term loans of 3.2 billion yuan (its 2008 total revenue was 3.7 billion). It also obtained 5.6 billion from two loans guaranteed by its controlling shareholders, Liaoning Huajin Chemical Group and its owner the group parent Norinco Group. Liaotong listed four subsidiary companies and 24 related parties held by North Huajin or Norinco. Aside from business-related entities such as import and export, fine chemicals and catalyst production firms, the related parties includes a hospital, a hotel, geotechnical and engineering design research companies and a finance company. Liaotong in 2009 began to sign a series of ‘Crude Oil Purchasing Agreements’ with Norinco-affiliated firms. In 2009 alone, it actually bought 2.89 billion yuan worth of crude oil, surpassing its entire operating revenue in cost. This practice was repeated in 2010 and 2011 when it purchased 16.10 billion and 27.02 billion yuan of crude respectively—raisingthe ratio of related party purchases to total cost close to 100%;. Sales to related parties similarly reflect a jump in company operations—in 2010 and 2011, operating revenue skyrocketed from 2.75 billion yuan to 23.93 billion yuan and 37.56 billion yuan. Related party sales accounted for

18 The full name of the China Ordnance Equipment Group Corporation (usually referred to as “China North Industries Group Corporation” (Norinco Group)), a SASAC owned central SOE. 19 The loan amounts were 325 million yuan, 1 billion yuan, 1.5 billion yuan and 400 million yuan, expiring in 2017, 2015, 2015 and 2015, respectively. 14 20% and 31% of this new income. Liaotong Chemical illustrates a massive business group- financed and -led expansion of Norinco group’s internal capabilities without influence of group-external institutions, markets or strategy. Sales of petrochemical products to group members guarantees the massive build up in production capacity will be covered by non- market demand. Norinco’s strategy represents a significant model of development among the NOPCs.

Sinopec Versus SASAC Qiu Lin (2010), a well-known media commentator and industrial analyst, asked, tongue-in- cheek, ‘Who is Sinopec trying to bamboozle by selling its equity in real estate property for 1 yuan?’ In April, 2010, Sinopec indeed sold its 50% interest in Zhuhai Huarui Property Management and Construction Company held by Sinopec’s Yanshan Petrochemical subsidiary. In a statement responding to criticism, Yanshan clarified that the 1 yuan price was justified as the real estate company was burdened 14.6 million in debt and had negative net assets. As Qiu notes, however, Sinopec is sandwiched between SASAC/government and shareholders/market. One month prior, in response to overheating real estate market, central SASAC issued the infamous ‘exit order’ (qingtui ling), requiring that with the exception of sixteen CSOEs that specialize in real estate, all other CSOEs must exit the industry (amounting to over 220 subsidiaries under 78 different CSOEs) within six months. Sinopec Limited’s sale could be interpreted as an expression of its anger at SASAC’s order. By the end of 2010, Sinopec and PetroChina were joined only by five other CSOEs in jettisoning their real estate assets, leaving 71 other CSOEs with more than 200 subsidiaries still continuing their real estate businesses (Zheng 2010). As Cao (2000) has argued in a different context, this selling off of state assets occurred without any regulatory oversight (from SASAC or any other government bureau) or administrative appraisal, incurring a critical response from individuals regardless of stock market performance and viability of real estate businesses.

Schizophrenia: Jilin Chemical Engineering Jilin Chemical Engineering was listed in Shanghai in 2003, raising 391 million yuan. It was 49% controlled by Jilin Chemical Group, a wholly-owned subsidiary of CNPC. Its main business is contracting oil and petrochemical, municipal utility, housing, smelting, power and electrical engineering and construction, with over 50% of its sales coming from CNPC subsidiaries. Only a few short years later, in late 2008, Jilin Chemical Group signed a share transfer and asset swap agreement with Shanxi Coal Import-Export Group. Shanxi Coal paid 620 million yuan for the remaining 39.75% controlling interest of the listed company. Also, in exchange for seven legally independent coal trading companies, CNPC was able to withdraw all assets, liabilities and staff from the listed vehicle, which now trades as Shanxi Coal International Energy. Owing to different values of assets swapped, Jilin Chemical Group was required to pay 52 million yuan to complete the deal. Despite starting in 2002 by selling off, swapping assets or repurchasing shares of numerous listed subsidiaries, reabsorbing and consolidating oil and petrochemical assets that were previously listed under PetroChina, CNPC choose to list, then de-list Jilin Chemical Engineering during this period. Yet this is not an isolated incident, or simply CNPC. On May 23, 2013, Sinopec Group’s Sinopec Engineering began trading on the Hong Kong stock market, with Sinopec Group holding 67% block of ownership. Kunlun Energy,

15 another Hong Kong listed firm that is 62% controlled by CNPC, bought key gas pipeline assets by purchasing a majority share of Beijing Natural Gas Pipeline Company in December, 2010 (Wang and Zhang 2011). Bucking both the initial promise made to investors at the time of listing and the trend of consolidation of assets under their main listed vehicles, PetroChina and Sinopec Limited, CNPC and Sinopec Group have engaged in schizophrenic oscillation between building multi-divisional firms like those common in the West and expanding business groups with murky asset transfers and growing RPTs.

Discussion What were the goals of CNPC and Sinopec Group in their delisting of companies over the past decade? Both Tang et al. (2006) and CITIC securities (Yin 2005) outline problems that are solved by ‘privatizing’ (delisting) subsidiaries. Among these are lack of capital (listed companies quickly lose the ability to attract fresh capital), shareholder interference (important decisions must pass through shareholder meetings), too much competition in the same national product and supply markets (subsidiaries competing for customers and resources), and excessive RPTs (hurt shareholders). The implication is that by making subsidiaries into branches under a dominant parent, similar to a multi-divisional firm, the problems will be solved or at least alleviated: less capital to subsidiaries means more capital for the parent; less scrutiny from shareholders means less interference in execution of business decisions from above; less competition makes it easier to make and sell products; and less RPTs means that all transactions become invisible inside the ‘visible hand’ of the multi-divisional corporation. This would confirm Brødsgaard’s (2012; Steinfeld 2010) insight that corporatization of state sector forces firms to act according to global market conditions, fortifying the commercial supremacy of the West. Yet evidence presented both in ownership chains, listing of new subsidiaries and expansion of related party transactions belies such a neat convergence. The NOPCs examined here, including some of the most powerful businesses in the world, also present evidence to the contrary. By listing, many of the NOPC group subsidiaries are, in fact, outsourcing scrutiny of and building capability for business operations rather than accessing capital as is normally assumed. Returning to RPTs, they show a slight decrease for NOPCs overall, as well as Sinopec Limited and PetroChina. Yet other NOPCs, both including and excluding Sinopec and CNPC subsidiaries, increased RPTs. In the case of purchases, the ratio to total costs has doubled, even as costs overall grew. The findings indicate that business group organization and development remains a significant, and increasingly important, aspect of the oil and petrochemical industry in China. On one hand, the shift over the period is towards much more reliance on suppliers to the NOPCs, differing from other findings (Lu et al. 2004) and perhaps indicative of the nature of the industry, with a limited number of suppliers of a scarce resource. On the other hand, Sinopec Limited and PetroChina have reduced their reliance on RPTs, particularly suppliers, as more of upstream oil and petrochemical supplies are transferred to their remit. Movement towards a Western multidivisional firm is reflected in the increasing ratio of RPTs for Sinopec Group/Sinopec Limited’s and CNPC/PetroChina’s subsidiaries. Thus, there are mixed results in terms of whether China and its NOPCs are operating in an environment where more market-supporting institutions are present. Evidence on financial market development outside business groups shows clearer evidence that external financial institutions have shown poor growth or effectiveness from

16 2007 to 2011. Debt-based financing grew, particularly for large, key CSOEs. Increasing utilization of finance companies is evident in the massive loans floated by CNPC, Sinopec Group, CNOOC, Sinochem and Norinco. NOPCs are moving away from external financial markets and scrutiny, suggesting more ineffectual finance markets in 2011 compared with 2007. Informal finance lends evidence to this conclusion. Outstanding payments both to and from listed NOPCs nearly doubled over the five year period. PetroChina, in particular, utilizes outstanding payments to its group suppliers to keep capital from flowing out. Yet these can be argued to be business accounting expenses, a regular part of transacting in the oil and petrochemical industry. This interpretation is backed up by the significant decrease in ‘other’ related party transactions, which have fallen significantly, and average only a few million yuan per company. Potentially, these transactions provide a small opportunity for graft or malfeasance at a local level, but are increasingly insignificant for overall corporate financing. This, contrary to the examination of debt and finance companies, implies that NOPCs are increasingly utilizing internal finance for business-related expansion. It is in this context of property rights and corporate governance over state assets and businesses that listing on the stock market must be understood. Wang Yong, immediately prior to retiring as the head of SASAC, outlined the future direction of reforms to central and local SOEs as further listing on the stock market and creating boards of directors (Chang 2013). The goal is not to access capital, as this is abundantly available through bank loans and internal finance. An Economist (2001) story from Yanshan, a town on the outskirts of Beijing built and run by Sinopec Group, suggests another answer. Preparing for the listing of Sinopec Limited in 2000, Sinopec Group divided the town into productive and non- productive assets (including people), while Morgan Stanley and KPMG consultants ran around holding study sessions with managers and employees on how to be a good capitalist. The irony of such a ‘campaign’ to change Yanshan townspeople’s ideology to index their value and daily work to such a fetishistic-financial sign as a stock market ticker was perhaps lost on the author at the time.20 To list assets, what was needed was to change managerial and employee frameworks of value to facilitate governance arising from the institution of the stock market. Sinopec Group, then as now, faced choices on how to maximize group and limited company resources to engage its historical welfare burden, lifetime commitment to employees, the running of town utilities, administration of local schools and hospitals, and management of (employee) apartment complexes. Financiers and investors view separation into productive (relative to financed business operations and activities) and non-productive parts as sufficient to ensure property rights of shareholders and resulting corporate governance. Yet the creation of property rights and goals of listing, in and of itself, for groups, and the resulting scrutiny through corporate governance, play out quite differently when the business group nature of the companies is understood.

The findings of the four research questions explored in this paper yield important advances in understanding big business policy in China. Rather than ‘transitioning’ towards a market economy, big businesses have already transitioned, and the key sites at which corporate governance occurs are at the interfaces between state officials/SASAC and business groups and between business group parents and subsidiaries. Following the

20 The Economist author notes that the stock market price of the newly listed Sinopec Limited was subsequently prominently displayed in the lobby of the Sinopec headquarters building in Beijing. The parallel with the idolatry and adulation given to Mao portraits and tchotchkes only two dozen years previous is uncanny. 17 ‘confounding webs’ in some groups sheds light on the endless chains of subsidiaries that cloud the organizational understanding of China’s largest and most important business like so much octopus’ ink (Cao 2000:41). The futility of attempting to understand a singular, legally independent ‘firm’ in the context of China’s socialist market economy is apparent through the chains and interfaces highlighted in this paper. Not only international trade, investment and expansion policy, but also multinational firms looking to work with China should take note and pay careful attention to the nature of big business in China today.

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24 Appendix 1. Profile and 2007 to 2011 Annual Reports Consulted21 of NOPCs in 2011

Block Stock Ultimate Nature Full English Name Ownership Code Shareholder of Shareholder (2011) Shaanxi Yanchang Shaanxi province, 600248 Petroleum Chemical Yan'an city and Yulin 62% LSOE Engineering Co., Ltd. district SASACs

Maoming Petro-Chemical 000637 Taiyue Real Estate 30% Private Shihua Co.,Ltd.

Yueyang Xingchang Petro- 000819 Sinopec Group 23% CSOE Chemical Co.,Ltd. Shenyang Chemical Shenyang Chemical 000698 Group (ChemChina 34% CSOE Industry Co., Ltd Group) China Petroleum & 600028 Chemical Corporation Sinopec Group 76% CSOE (Sinopec Corp) Zhou Yifeng, Zhou 002221 Oriental Energy Co., Ltd. 51% Private Hanping PetroChina Company 601857 CNPC 86% CSOE Limited Xinjiang Dushanzi Tianli Dushanzi district 600339 High ＆ New Tech Co., (Karamay city) 23% LSOE Ltd. SASAC Sinopec Shandong Taishan 000554 Sinopec Limited 25% CSOE Petroleum Co.,Ltd. Shennan Oil Group (Nanshan district Shenzhen Guangju Energy 000096 (Shenzhen) SASAC, 58% LSOE Co., Ltd. COSCO, Shenzhen Investment) Sinopec Shanghai 600688 Sinopec Limited 56% CSOE Petrochemical Co., Ltd.

China Oilfield Services 601808 CNOOC 54% CSOE Limited (COSL) Haiyue Economic 600387 Zhejiang Haiyue Co., Ltd 22% Private Development Limited

21 Annual reports downloaded from the SSE website, www.sse.com.cn, and SZSE website, www.szse.cn, and the “Annual Reports” section of vip.stock.finance.sina.com.cn, all accessed from July, 2012 through December, 2013. 25 Xinjiang Zhundong 002207 Petroleum Technology Co., Qin Yong 8% Private Ltd. Nanjing Changjiang Nanjing Tanker 600087 Oil Transport (CSC- 55% CSOE Corporation SinoTrans) Offshore Oil Engineering 600583 CNOOC 49% CSOE Co., Ltd.

Sinochem International 600500 SinoChem Ltd 56% CSOE Co., Ltd. Jichai Power Jinan Diesel Engine Co., 000617 Equipment Company 60% CSOE Ltd. (CNPC) Sinopec Yizheng Chemical 600871 Sinopec Ltd 42% CSOE Fibre Co., Ltd. Huachuan Oil and Sichuan Meifeng Chemical Gas Exploration 000731 14% CSOE Industry Co., Ltd. Company (Sinopec Group) Daqing Petrochemical 000985 Daqing Huake Co., Ltd. Factory, Linyuan 55% CSOE Refinery (CNPC) Xinjiang Foreign Xinjiang International 000159 Economic & Trade 31% Private Industry Co., Ltd. Group Huajin Chemical Liaoning Huajin Tongda 000059 Industries Group 51% CSOE Chemicals Co., Ltd. (Norinco) 002192 Luxiang Co., Ltd. Ke Rongqing 21% Private Sichuan Jinlu Group Co., 000510 Hongda Group 5% Private Ltd. Haihua Group 000822 Shandong Haihua Co., Ltd. 40% CSOE (CNOOC) 002040 Nanjing Port Co., Ltd. Nanjing SASAC 63% LSOE Kingdream Public Limited 000852 CNPC 68% CSOE Company Sichuan Chemical 000155 Sichuan SASAC 63% LSOE Company Limited 000407 Shandong Shengli Co., Ltd. 43 individuals 9% Private

Sichuan Tianyi Science & Haohua Group 600378 23% CSOE Technology Co., Ltd. (ChemChina Group)

26 Appendix 2. 2007 to 2011 diluted earnings per share, weighted average return on equity,22 return on assets,23 and debt to asset ratios the companies for NOPCs

CSOEs

2007 2011

Stock Debt/ Debt/ Growth in Name Code Asset Asset Debt/Asset EPS ROE ROA Ratio EPS ROE ROA Ratio ratio 000819 Yueyang Xingchang -0.011 -0.65% 16.54% 64.96% 0.18 7.50% 19.30% 10.09% -84.47% 000698 Shenyang Chemicals 0.3656 9.98% 15.93% 63.55% 0.32 6.73% 14.94% 52.89% -16.78% 600028 Sinopec 0.634 19.52% 26.70% 18.19% 0.795 15.93% 36.50% 54.91% 201.80% 601857 PetroChina 0.75 22.80% 32.82% 26.77% 0.73 13.60% 30.17% 43.54% 62.67% 000554 Taishan Oil 0.15 7.69% 27.15% 9.76% 0.0192 1.05% 23.99% 5.56% -43.07% Shanghai 600688 Petrochemical 0.221 7.89% 15.84% 29.19% 0.131 5.24% 33.94% 40.91% 40.16% China Oilfield 601808 Service 0.54 19.86% 13.09% 25.40% 0.9 14.85% 9.24% 56.22% 121.35% Changhang Oil 600087 Transport 0.54 15.80% 5.34% 59.04% -0.227 -14.93% -1.00% 73.55% 24.59% Offshore Oil 600583 Engineering 1.13 30.87% 16.61% 50.47% 0.05 1.98% 5.68% 49.41% -2.09% Sinochem 600500 International 0.46 18.50% 10.91% 52.08% 0.54 12.77% 9.97% 65.46% 25.67% 000617 Jichai Diesel 0.41 15.60% 11.26% 63.88% -0.34 -12.15% 5.01% 77.04% 20.59%

22 Fully diluted return on equity or “return on net assets” is calculated and listed in companies’ annual reports. It is calculated by a formula stipulated by the China Securities Regulatory Commission (CSRC 2007: Rule 9, Article 5) as profit divided by the sum of net assets at the start of the report period, plus net profit divided by two, plus the number of newly-issued or debt to equity swapped shares times the ratio of the number of months that the newly added shares were included in the report period to the total number of months in the report period, minus the reduction in shares due to share repurchases or shrinking shares times the ratio of the number of months that the reduced number of shares were included in the report period to the total number of months in the report period. It is expressed by the formula ROE = . ( × ௉ × ) ಾ 23 ಿ ು ಾ ೔ ೕ బ ೔ ೕ Return on assets is calculated by the authors as net income divided by average assets in given year. ா ା మ ାா ቀಾ బቁିா ൬ಾ బ൰ Yizheng Chemical 600871 Fibre 0.004 0.22% 10.97% 17.76% 0.21 9.68% 17.24% 21.13% 18.94% 000731 Sichuan Meifeng 1.0078 24.10% 19.01% 40.83% 0.4826 14.25% 7.65% 44.93% 10.04% 000985 Daqing Huake 0.14 4.20% 13.42% 10.70% 0.19 5.20% 21.50% 15.97% 49.32% 000059 Liaotong Chemicals 0.362 12.75% 11.10% 36.81% 0.7014 12.03% 18.87% 73.55% 99.79% 000822 Shandong Haihua 0.39 10.13% 14.18% 53.23% 0.43 11.00% 18.77% 41.69% -21.68% 000852 Jiangzuan Limited 0.3 10.35% 24.75% 39.22% 0.26 10.08% 22.86% 38.85% -0.93% 600378 Tianke Limited 0.1 6.56% 19.32% 38.84% 0.23 11.30% 17.36% 36.25% -6.66%

Average 0.42 13.12% 16.94% 38.93% 0.31 7.01% 17.33% 44.55% 14.45% Average without Sinopec- 0.38 12.12% 15.34% 40.98% 0.25 6.04% 15.33% 43.97% 7.29% PetroChina Sinopec-PetroChina 0.69 21.16% 29.76% 22.48% 0.76 14.77% 33.34% 49.23% 118.97%

LSOEs

2007 2011

Stock Debt/ Debt/ Growth in Name Code Asset Asset Debt/Asset EPS ROE ROA Ratio EPS ROE ROA Ratio ratio 600248 Yanchang Huajian 0.05 -215% 3.88% 97.31% 0.3507 18.54% 13.06% 72.07% -25.93% 600339 Tianli Gaoke 0.087 3.35% 6.92% 61.86% 0.1088 4.40% 8.49% 64.39% 4.09% 000096 Guangju Energy 0.44 16.12% 7.94% 13.26% 0.18 5.30% 4.82% 8.87% -33.08% 002040 Nanjing Port 0.08 3.96% 11.62% 13.67% 0.1501 6.55% 7.91% 37.49% 174.25% 000155 Sichuan Chemical 0.29 8.05% 18.75% 34.05% -0.44 -14.16% 7.46% 51.86% 52.30%

Average 0.1894 7.87% 9.82% 44.03% 0.0699 4.13% 8.35% 46.94% 6.60% Note: Yanchang Huajian's 2007 ROE is factored out due to exceptional circumstance of issuing a large amount of equity for new assets. Private

000637 Maoming Shihua 0.28 16.98% 20.55% 8.89% 0.01 0.97% 15.84% 0.71% -92.04% 002221 Huadong Energy 0.26 22.92% 8.27% 71.65% 0.353 11.81% 5.99% 77.50% 8.16% 600387 Haiyue Limited 0.54 17.76% 1.83% 48.83% 0.02 0.94% 2.71% 48.43% -0.83% 002207 Zhunyou Limited 0.36 16.09% 19.60% 45.80% 0.11 2.96% 12.18% 44.55% -2.72% 000159 Internationl Industry 0.3 10.75% 23.47% 53.14% 0.68 17.59% 13.17% 36.21% -31.85% 002192 Luxiang Limited 0.6 33.80% 11.97% 43.62% 0.03 1.63% 9.10% 74.68% 71.23% 000510 Jinlu Group 0.1324 6.86% 12.46% 55.29% -0.19 -10.60% 3.47% 52.49% -5.06% 000407 Shengli Limited 0.06 3.54% 7.19% 67.71% 0.01 0.59% 6.55% 55.24% -18.41%

Average 0.31655 16.09% 13.17% 49.37% 0.1279 3.24% 8.63% 48.73% -1.29% Appendix 3. Companies delisted by CNPC/PetroChina and Sinopec Group/Limited

Stock Listing Year Off Method of New Company Parent Code Date Market Removal Company Disposed to Other Companies 600772 Sold Same; 2006 Longchang 1996 CNPC 2002 400052 shares delisted Sinopec Asset Rong Feng 000668 Wuhan Oil 1996 2008 Limited swap Real Estate Shijiazhuang Sinopec Asset Changjiang 000783 1997 2007 Refinery Limited swap Securities Sold 600593 Dalian Shengya 2002 CNPC 2009 Same shares Asset Dongbei 000686 Jinzhou Liulu 1996 CNPC 2007 swap Securities Sinopec Asset 600886 Hubei Xinghua 1996 2002 SDIC Huajing Group swap Sinopec Asset Changjiang 000520 China Pheonix 1993 2006 Group swap Phoenix Yanhua High- Sinopec Sold Beijing 000609 1996 2005 Tech Group shares Mainstreets Asset 600764 Sanxing Oil 1996 PetroChina 2002 CEC Corecast swap Jilin Chemical Asset Shanxi 600546 2003 CNPC 2009 Engineering swap Coal Sinopec Sold Wintime 600157 Taian Lurun 1998 2007 Limited shares Energy “Privatized” Jinzhou 000763 1997 PetroChina 2005 Buyback n/a Petrochemical 000817 Liaohe Oilfield 1998 PetroChina 2005 Buyback n/a Yangzi Sinopec 000866 1998 2006 Buyback n/a Petrochemical Limited Zhongyuan Oil Sinopec 000956 1999 2006 Buyback n/a and Gas Limited Qilu Sinopec 600002 1998 2006 Buyback n/a Petrochemical Limited Sinopec 000406 Daming 1996 2006 Buyback n/a Limited Jilin 000618 1996 PetroChina 2006 Buyback n/a Petrochemical