There is little escape for those in China being investigated for “serious violation of discipline.”
This ambiguous one sentence message from the Ministry of Supervision has sealed the fate of several senior executives and high-flying officials since the end of August. The net has trapped both “tigers” and “flies” – Chinese President Xi Jinping’s reference to high and low-level figures accused of corruption. All of them are connected to China National Petroleum Corporation (CNPC), the largest oil firm in the country.
Barely a few hours had passed from the conclusion of the Bo Xilai trial before the first of these investigations were announced. Over the following week the tale has grown from simple talk of rooting out corruption to speculation of a full-on political purge.
So what exactly is happening, and what does it all mean? It’s not exactly clear. Politically, the implications won’t be apparent for quite some time. For investors looking at the China market, however, there is plenty of interest.
No big game hunter’s trophy wall is complete without the mounted head of a powerful beast.
The stand-out catch so far by the anti-corruption watchdog is Jiang Jiemin, who was dismissed from his post on Tuesday as the head of the central government body that oversees the biggest state-backed enterprises. Until March this year he chaired CNPC.
He is reportedly being probed for corruption linked to services contracts for a major Chinese oilfield he supervised in the late 1980s. Yet his biggest crime could have been his association to former CNPC general manager Zhou Yongkang, under whose patronage he rose to prominence.
Zhou is a big name and a bigger target. The former Sichuan province party boss and head of the Ministry of Public Security, who in 2007 was elevated to the top as a member of the Politburo standing committee, is under pressure thanks to his spirited defense of political outcast Bo Xilai.
“Zhou is the tiger in the cross-hair; rounding up associates is standard police procedure,” energy analyst Yu Luban with Jefferies in Hong Kong wrote in a note on Monday.
Hints of reform
A political shakeout at the top of state-owned enterprises (SOEs) could be a blessing. Putting pressure on these giants to reform would make them more efficient and therefore more productive for the economy.
They don’t come much bigger than CNPC. The leviathan of the oil industry employs over 1.6 million people in China and reported revenue of US$408.63 billion in 2012, ranking fifth on the 2013 Fortune 500 list. It produces the bulk of domestic crude and refined oil products.
It is not necessarily a lack of political will that is the biggest obstacle to moving forward on this front. Beijing and the World Bank co-authored a report published in 2012 citing the need to rein in the reach of these enterprises. The ability push them through is. Although there are fewer SOEs today than in the early 1990s when privatization was first enacted, those that survive have amassed strong political leverage that they use to block reforms.
Clearing out the stalwarts of SOE influence such as Zhou and Jiang could be a sign the government finally has the political capital to mount big changes. “If he succeeds in bringing down Zhou, President Xi would show that no opponent, regardless of rank, is safe. His unfettered ability to defeat his enemies will boost Xi’s capacity to execute his policies,” Arthur Kroeber, managing director of research firm GaveKal Dragonomics, wrote in a note.
Taking on the energy industry, one of the most protected state-controlled fields, also sends a broader signal. “The fact that the central government is willing to really shake a big strategic state-owned enterprise seems very promising in terms of the outlook for SOE reform,” Wei Yao, senior economist at Societe Generale in Hong Kong, told China Economic Review.
Proceed with caution
Industry shakeouts create opportunities as well as turbulence.
SOEs could become more transparent in their operations as internal management and external monitoring by the state will likely be strengthened, Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, told China Economic Review.
Unleashing the true potential of the assets that these lumbering giants sit on is a tantalizing prospect. Energy firms control vast oil and gas reserves, while telecoms operate huge communications networks. State-backed lenders are the custodians of significant funds. Better management could improve how these resources are utilized.
The anti-corruption focus may lift efficiency and return on equity at the largest state-controlled firms, Nomura analyst Wendy Liu wrote in a note. She called for investors to “accumulate the big SOE machines on any weakness” as their share prices could get a boost.
Nevertheless, it is unclear at this stage to what extent the anti-corruption campaign will facilitate SOE reform. Progress on previous pledges has been limited so far.
The subject is sensitive and should be viewed as a longer-term game, Stephen Green, head of China research at Standard Chartered, said in a report on Monday. “We think of SOE reform as a Darwinian process rather than something to be prescribed in a document or tackled head-on.”