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