The Party: The Secret World of China's Communist Rulers (11 page)

For starters, Chinalco had emerged as a bidder for Rio-Tinto only after going through what investment bankers call a beauty parade, so called because of the way corporate contestants line up to pitch their wares to win business mandates. In this case, the contest had been conducted in secret by the Chinese government itself. So many state companies in the energy and steel sectors had responded to the Politburo’s patriotic call to take on BHP-Billiton that the government put the choice of the Chinese bidder to an internal tender. Chinalco won because of the commercial competence the company had displayed at home and its steady game abroad. But the government’s interest meant that Xiao had the leadership’s hand on his shoulder at all times.

Critics also pointed out how Chinalco had chosen its parent company to make the bid, instead of the overseas listed subsidiary in the case of CNOOC. The decision had compelling commercial reasons, as Chinalco was a diversified mineral group like its target, Rio-Tinto. But there was also a strong political incentive. The parent company was 100 per cent state-owned, which made for rapid decision-making, without the kind of interference from the pesky international directors that had tied up CNOOC’s tilt for Unocal. Then there was the way Chinalco’s bid had been financed. The money came from a consortium led by the China Development Bank. Initially established to fund local infrastructure projects, CDB had lofty ambitions to follow China Inc. abroad. The political heft behind the Rio-Tinto bid was evident from the way the financing was approved, directly by the State Council, or cabinet, without CDB’s board even discussing the loan.

Finally, there was Chinalco’s ability to sustain its bid at a time its international rivals had to retreat because of the global credit crunch. In barely half a year, a once-in-a-generation bull market in commodities had turned sharply sour with the world economic downturn. The giant BHP-Billiton retreated, dropping its takeover offer for Rio-Tinto in late 2008, and momentarily withdrawing from the battlefield to reassess strategy. When it launched its offer to double its shareholding in Rio in February 2009, Chinalco was bleeding as badly as other resources companies around the world. On paper, Chinalco was down a cool $10 billion on its initial $14 billion outlay on Rio-Tinto shares. The Chinese company’s core businesses were losing money as well. With the backing of the flush Chinese state, however, Chinalco still had the firepower to press ahead, offering $19.3 billion to lift its stake in the debt-laden Rio-Tinto and gain control of prize mining assets.

Chinalco’s costly tilt at Rio-Tinto was already the target of internal sniping within the government. Lou Jiwei, the head of China’s fledgling sovereign investment fund, then under attack for making poor offshore investment, had been flailed on the internet after defending his fund’s initial offshore investments, then sharply down on paper. ‘Corrupt, despicable and shameless, he has used money earned from the blood and sweat of the people to realize his personal objectives,’ scrawled one netizen after Lou’s speech at Tsinghua University in late 2008. Privately, Lou complained that people should examine Xiao Yaqing’s record at Chinalco instead. They are down $10 billion, he said, and I am being attacked for losing a fraction of that! In the public market place, Xiao had fallen flat on his face. Backstage, however, Xiao had been nimble enough to play up his political achievements and take credit, however misleadingly, for derailing BHP-Billiton’s bid. ‘Xiao has said repeatedly that his goal was to stop a merger of two [foreign] mining giants,’ reported
Caijing
magazine, ‘and that he had succeeded.’

The most blatant public display of Chinalco’s cosiness with the state was yet to come. While Xiao, the businessman, was negotiating to double Chinalco’s investment in Rio-Tinto, news began to leak out that Xiao, the politician, was also in discussions over promotion onto a powerful new government job attached to the cabinet in Beijing. Foreign advisers to Chinalco noted Xiao’s nerves in the final tense days of talks with Rio-Tinto in London. If the deal didn’t get done, Xiao joked darkly, it mightn’t be worth his while to return home to Beijing at all. The moment it was sealed, Xiao’s promotion to the cabinet position was formally confirmed. In China, the deal and the promotion were tied together. Without the second agreement to increase Chinalco’s stake in Rio-Tinto, Xiao would have lost billions of dollars in state funds and failed to secure a new resource base for both his company and his country at the same time. In other words, he would have fallen short on both commercial and political grounds.

Chinalco’s attempt to double its stake in Rio-Tinto foundered a few months later, in June 2009, on largely commercial grounds, but it might have run aground anyway, for reasons similar to those for the CNOOC debacle. Xiao’s promotion to the cabinet position was the last straw, ensuring that any genuine commercial rationale for Chinalco’s investment in the Anglo-Australian miner was overshadowed by suspicion about the hidden hand of the Chinese state. Chinalco had been hand-picked to do the deal by the government; its funding had been approved directly by the cabinet; its bid had come from the parent company to minimize outside scrutiny; and its CEO had left the company for a party-approved government position days after negotiating the final deal, to be replaced by another state business executive also chosen by the Party. Not long after the deal collapsed, four of Rio’s China-based executives were arrested in Shanghai by state security on allegations of bribery and commercial espionage. It was no wonder that political opponents of the deal in Australia were able to portray Chinalco as an agent of the state. For a Party on a mission to convince sceptics that Chinalco was an independent entity, it was another wrenching own goal.

Chinalco executives at least tried to engage with their critics and respond publicly to their concerns. Not all state enterprises endeavoured to make their case in public, however misleading it may have been. For companies like the China National Petroleum Corp., better known as PetroChina, thumbing its nose at its detractors at home and abroad had long been second nature. PetroChina is best described as the Exxon-Mobile of China, a big, bad oil company with an aggressive corporate swagger, tight political and military connections and a couldn’t-care-less attitude about the views of others. The company’s rough-and-tumble streak had been bred producing oil in some of the most inhospitable parts of the country, far from the bureaucratic confines of the capital, in Xinjiang, in the distant west, and in Daqing, in the north-west.

At the start of the enterprise’s restructuring in the late nineties, PetroChina had been ten times bigger, by employee, than any other oil company in the world. ‘The best way to describe PetroChina, as it was then, was the Ministry of Petroleum,’ said Paul Schapira of Goldman Sachs, which underwrote the global listing in 2000 of China’s largest oil producer. In the process of repackaging itself to sell a portion of its shares to foreign investors, the group shed one million staff and the ministry disappeared altogether, leaving the company with little direct oversight from the government. Many of the once powerful ministry bureaucrats took new positions staffing the revamped company’s executive ranks, making the enterprise more independent than ever.

Few outside of the industry had heard of the company until it went offshore to Sudan in the late nineties, in search of new sources of oil to replace the ailing Daqing fields. The investment put the company, and Chinese overseas investments in general, on the map in a way Beijing had not anticipated. When human rights activists campaigned to draw global attention to Sudan’s suppression of a rebellion in the country’s Darfur region, they trained their sights not just on Khartoum. They went after PetroChina, which they said had become Khartoum’s chief enabler, as well. The campaign depicted PetroChina and its parent company which held the Sudan assets as one part of the monolithic hulk of an indivisible China Inc. The Party appointed the top executives of the parent company and its overseas-listed subsidiary. A government agency held its shares. Common sense dictated that the company and the state were fused together as a single entity. The obvious conclusion was that the company was in Sudan solely on the Chinese government’s business.

The controversy, which reached a peak ahead of the 2008 Beijing Olympics, masked a much more complex reality evolving inside China over the politics of state enterprises. The bids by CNOOC and Chinalco were initially largely uncontroversial at home because they had broad backing across the government. That was not the case with PetroChina. It turned out the company was just as unpopular in parts of the foreign policy establishment in Beijing as it was overseas, although not for the same reasons. Chinese officials and scholars were not much concerned with PetroChina’s investment in a country with an abominable human rights record. They could point to the long western engagement with decidedly undemocratic Saudi Arabia and other oil-rich states. They were critical because they saw a single company taking over Chinese diplomacy on a sensitive issue in the name of finding oil.

Even worse, PetroChina then managed the oil solely in its own profitable interests, indifferent to the foreign policy implications. A brace of academics I interviewed in 2007 volunteered criticism of how Petrochina, far from benefiting China, had sold much of the oil produced in Sudan to the highest bidders in the international market, especially Japan. ‘I am not worried about whether [the Party] controls or directs these companies. It is what these companies do that worries me,’ said Zhu Feng, at Peking University. ‘These state-owned companies have become very powerful interest groups. They even hijacked China’s foreign policy in Sudan.’

PetroChina did less than brush off this highly unusual public criticism from highly placed scholars. In typical style, the company did not even bother to reply. With China increasingly dependent on oil imports, PetroChina had a strong hand to play against its critics at home. But when it came to throwing their weight around in the domestic economy, however, China’s big oil companies confronted a more perilous political environment. ‘The secret to success is to demonstrate managerial prowess, while not causing problems for the Party,’ says Erica Downs of the Brookings Institution. In a fight over fuel prices in 2005, the oil companies pushed their interests too far.

PetroChina, along with Sinopec, China’s largest oil refiner and the country’s biggest company by revenue, had long bristled at tight controls on domestic oil prices. When the government refused to match the precipitous rise in global petrol prices in 2005 at domestic pumps, the two companies played hardball in an effort to change the policy. Sinopec was particularly under pressure. As the country’s largest oil importer, it was losing money on every litre of foreign fuel it sold into its home market. In a high-stakes game of bluff, several large refineries were suddenly mothballed for what the companies called ‘scheduled maintenance’. The companies’ actions, as ruthless as any corporate behaviour in the west, created serious shortages of fuel in southern China, which relied almost entirely on imported oil, and also in the Yangtze delta around Shanghai. The threat of angry truckers and taxi-drivers being forced to queue to get petrol in the summer heat, not to say businesses being forced to close down for lack of fuel, backed the authorities into a corner. Wen Jiabao, the Premier, personally stepped in to negotiate an end to the dispute, approving a lump-sum subsidy to the companies to solve the shortages.

Much as the scholars had criticized PetroChina for putting profits ahead of the national interest, furious local commentators complained the oil giants wanted the benefits from being state-owned semi-monopolies without any countervailing responsibilities. This time, most of the criticism focused on Sinopec, which supplied most of the fuel in southern China. Behaving badly overseas was one thing. Running China’s industrial centres out of fuel was much worse. As Sinopec’s CEO was to discover later, the company’s tactics made him some powerful enemies.

When Chen Tonghai, the Sinopec CEO, was detained on corruption charges two years later, in 2007, the press was full of lurid stories about his mistress, a woman who acted as a courtesan for a number of ministerial-level officials and brought them all down. Senior industry executives I spoke to, however, traced his fall to the oil crisis two years beforehand. Chen, a princeling, had long been corrupt. His personal expenses amounted to about $5,880 a day, according to his colleagues, not much less than his official monthly salary. But when Chen took on senior leaders during the fuel crisis, he handed his enemies an excuse to bring him down. ‘As the head of a state company, you are expected to fight your corner,’ said one industry executive. ‘But you also have to know when to quit.’

That Chen’s downfall was about more than just corruption was evident from his party-appointed replacement. The corruption inquiry into Chen left Sinopec, a key state company, in a mess. Chen’s replacement, Su Shulin, had just the kinds of skills the Party required to clean it up. His role was not unlike that of Harvey Keitel in
Pulp Fiction
, the clean-up man who scrubs a car of blood to remove all evidence of a crime. Su had worked in the oil industry but his main experience was in party bodies. In a similar way, Su was sent into Sinopec as a kind of fireman, to re-install the party discipline which the authorities felt Sinopec had lost under his predecessor. Su’s priorities were evident when he began visiting Sinopec’s numerous joint-venture partners. He seemed to know little about the businesses themselves. To the irritation of the company’s partners, Su seemed most agitated about something else altogether. Why, he kept asking, had their joint ventures not established Communist Party cells inside the companies?

In little over a decade, the Party had pulled off what few had predicted was possible, the construction of a profitable state sector, with independent commercial aspirations, but still ultimately under its control. For Chen Yuan, his freelance policy-making of the early nineties far behind him, the new century had been something of a triumph as well, politically and personally.