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21/11/2007 | China - The Oil Firms Thwart Beijing's Wishes

Stratfor Staff

Chinese state oil companies have been diverting funds toward precisely the type of lending Beijing is trying to eliminate as it seeks to calm the country's overheated economy, which primarily is fueled by excessively cheap credit and a dearth of profitable investment options.

 

Even though Beijing depends heavily on Chinese state oil players for carrying out its agenda, it ultimately lacks control over their activities, putting the government's economic agenda at risk.


Chinese state oil companies -- arguably a top recipient of generous state funding -- have been diverting funds, Chinese business newspaper the Economic Observer reported Nov. 19.

The oil companies' activities risk expanding China's growing stock and property
asset bubbles, which form part of one of Beijing's top headaches: the overheated Chinese economy.

Cheap capital and a severe lack of profitable investment options have fueled this overheating. China's leaders have tried for two years to rein in the number of financing channels available to high-risk Chinese investors -- many of whom have sunk their life savings and taken out second mortgages in order to catch a ride on spiraling Chinese equity and property prices.

In August, news broke that the government had closed a major Shenzhen-based illegal bank in a large coup (relative to the 70 illegal banking operations closed during 2006). The bank had operated for more than seven years, had outlets in cities all over the country and reportedly had handled more than $580 million in the 18 months before its termination. Scant details were released at the time of the closure, beyond that the bank's clients included both state and private companies and that it obtained its funds by offering deposit accounts with higher rates of interest than state banks to Chinese savers.

Now, it appears that subsidiaries of China's top oil players, China National Petroleum Corp. (CNPC) and China Petroleum and Chemical Corp. (Sinopec), also funded the illegal bank by processing the income they received from gasoline sales to Hong Kong buyers with the illegal bank.

Beijing and other international banks fund both CNPC and Sinopec (both are listed), so their oil subsidiaries probably were not doing business with the illegal bank to maximize company profit. More likely, local managers from the state oil subsidiaries were selling state oil supplies on the sly and using underground banking networks to process payments undetected.

Back alleyway banks formerly were not a speculative investor-related problem. The funding they provided was once exclusively for nonspeculative long-term business-building investments in small- to medium-sized enterprises that could not borrow from state banks. This changed in 2006, when the government started clamping down on state banks' ability to lend to stock market investors. Instead, these investors started borrowing from illegal banks, and they now account for more than 90 percent of all such illegally financed loans -- estimated by the government to be in excess of $107 billion annually.

CNPC and Sinopec are critical players in multiple priorities (such as foreign energy acquisitions and government corruption) that Beijing is juggling. As this latest episode shows, these oil majors operate in their own fiefdoms. The central government can issue as many directives as it likes, but -- just as it cannot control every local government under each government ministry -- Beijing ultimately cannot control every local subsidiary under these companies. The only real way to stop speculative investors from pouring their funds into overheated markets is to open up equally attractive alternative investment channels. Until then, the state bureaucracy will continue to cater to such investors' needs on the sly -- whatever Beijing's official wishes.

Stratfor (Estados Unidos)

 


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