A collapse that waves a ‘big red flag' about business with Beijing
The youthful Chinese man making his way up the aircraft aisle after take-off from Shanghai wanted to talk business with Lee Kuan Yew, the father of modern Singapore.
The 81-year-old former prime minister, a charismatic figure who inspires both respect and fear across Asia, did not expect the stranger's approach. “I was taken aback when he gave me his card,” he recalls.
The request was for Mr Lee's support in the purchase of a stake in Singapore Petroleum Company, a state-controlled oil refiner. The business card read: Chen Jiulin, managing director and chief executive officer, China Aviation Oil (Singapore) Corporation Ltd.
A few months after that mid-air encounter, Mr Chen and his company, a jet fuel importer controlled by the Chinese state but listed in Singapore, were high-flying no longer. On December 8, the CAO chief was arrested by police in the city-state founded by Mr Lee, after his company collapsed with $550m in derivatives losses.
The events have shone a spotlight on shortcomings common among Chinese state companies flaws that are often overlooked in the general enthusiasm about the country's emergence as a global trading and economic power.
By the time of Mr Chen's release a few hours later, the crash of CAO had turned into the biggest scandal to hit an overseas-listed Chinese company.
The implosion of a large company once hailed as a model corporate institution is also the most serious threat to Singapore's reputation as a financial centre (see right) since the derivatives losses generated from there by Nick Leeson brought down Barings Bank of the UK in 1995.
On Monday, CAO is due to present a restructuring plan aimed at convincing creditors including Goldman Sachs of the US and Australia's Macquarie Bank to keep it alive by forgiving more than half its $600m debt.
Singapore's stock exchange and white-collar crime unit are meanwhile completing investigations on who was responsible for CAO's dash towards insolvency and for keeping shareholders and creditors in the dark.
Aside from the fate of a company that last year supplied Chinese airlines with a third of their fuel is the impact the affair may have on international investors' perceptions of China.
The question for investors and companies that have bought into China's dream of growth and industrialisation is whether CAO was an aberration caused by one or more “rogue traders” or the first of many disasters waiting to happen as the country proceeds on its rapid journey from command to market economy.
“This is a big red flag for all those looking to do business in China,” says a creditor involved in the CAO debacle. “There are a lot of companies in China with huge franchises which exist at the whim of state-owned parents. Are they really that much different from CAO?”
In many respects, CAO is a classic example of a Chinese state company to which the government had granted control of a market. China Aviation Oil Holdings Company, its state-owned parent, has a near-total monopoly in supply of aviation fuel, and had made CAO its sole supplier of imports.
That monopoly prompted investors to buy into CAO's 2001 initial public offering, which was Singapore's biggest that year. Backed by the parent, which retained three quarters of its shares, the listed company's mission was clear: use foreign capital to increase profits and expand, while keeping a strategic industry in the hands of the state.
This is a familiar model, which has enabled Beijing to restructure and inject market practices into sectors that used to be economic deadweights, such as oil, telecommunications and power, without giving up ultimate control. The mix of entrepreneurial energy and state ownership has made the listed entities of China's state giants attractive for foreign investors.
With a privileged position within China's economy and the hope that Beijing would support them in times of need, state-owned enterprises have been considered compelling, and relatively low-risk, investments.
Like many of its peers, CAO was helped to thrive by this environment. Its profits grew by more than a third over the two-year period since the listing and its share price more than trebled, reaching a peak of S$1.89 in March last year. That valued CAO at S$1.8bn (US$1.1bn), prompting its inclusion in a number of blue-chip indices.
But in 2003, Mr Chen and his fellow directors decided to diversify away from oil into derivatives trading. The company never clarified what advantage it saw in a market in which it had no experience, but industry experts believe it thought it had spotted a lucrative niche.
Chinese domestic airlines were buying derivatives from securities houses as an insurance against swings in the price of crude. By offering its own derivatives, CAO would make the group into a one-stop shop for its airline clients, while reaping substantially higher margins than by acting merely as an intermediary for fuel shipments.
After becoming one of only 26 companies allowed by Chinese regulators to buy and sell derivatives overseas, CAO carried out its first deal a bet on a fall in the oil price in mid-2003. The trade was profitable. “That baited the hook,” says an industry expert. “They decided it was too good to refuse.”
While boasting about its risk-management rules, which limited individual traders' losses to $500,000 and company-wide ones to $5m, the company got deeper into derivatives.
CAO appeared invincible. Investment banks such as ABN Amro of the Netherlands and CLSA, the Asian arm of France's Crédit Agricole, introduced the company to foreign investors. Its risk-management systems were voted the best among Chinese companies by China National Enterprise Federation, a quasi-government body that includes most large groups.
Internally, though, the position was worsening. By the first quarter of 2004, “the company faced potential losses of US$5.8m”, according to an affidavit filed by Mr Chen at Singapore's High Court in November.
The loss, caused by a sharp rise in the oil price, breached CAO's internal limit. But CAO decided to “ride through” the problem, placing even larger bets “in the hope the oil market would trend downwards”, the document says.
“That was really when the die was cast for the company,” says a financial industry insider. “They should have stopped but instead they increased their exposure.” With the oil price nearly doubling from the middle of 2003 one of the steepest rises in recent memory CAO's paper losses on derivatives trading had by mid-October reached $180m.
Having already used more than $200m in cash to repay margin calls additional capital required to cover the losses the company did precisely what investors in state-controlled Chinese companies would expect. It asked its parent for help.
But instead of injecting its own funds into the company, CAOHC sold a 15 per cent stake in CAO on the market for S$196m, a 14 per cent discount to the market price, the affidavit says.
Mr Chen says the sale was “to raise capital for the margin calls” and the proceeds of the equity placement were loaned to CAO.
Yet, in its stock exchange announcement at the time, CAO did not specify the reason for the sale and a company official was quoted by Bloomberg News as saying the parent was raising cash for an “investment they are making”.
CAOHC's possible knowledge of the trading losses at the time of the share placement could expose it to charges of insider trading under Singapore's Securities and Futures Act.
Despite CAO's silence, rumours of the losses began circulating in Singapore's tight-knit community of oil traders. In November, worried creditors asked to see CAO's management.
Creditors say they were reassured that the parent company had requested permission from China's State Administration of Foreign Exchange to transfer funds of about $100m to CAO.
As the days went by and the bail out failed to materialise, creditors were told the matter had been passed to the State-owned Assets Supervision and Administration Commission (Sasac), the Chinese government body in charge of state companies.
As Sasac delayed a decision possibly to investigate the losses a creditor, South Africa's Standard Bank, decided it would wait no longer.
On November 17, it wrote to CAO threatening to open insolvency proceedings unless the company repaid the $14m it owed by December 9.
With the clock ticking, and Sasac still to agree the cash injection, it was CAOHC itself that delivered the death blow. On November 24, the parent declined to approve the intended S$362m loan-funded purchase of a 20.6 per cent stake in Singapore Petroleum the deal about which Mr Chen had (to no avail) lobbied Mr Lee on board the aircraft.
Without the parent's support, CAO had to seek court protection from its creditors a week later.
Some view CAO's fall from grace as purely the result of a breakdown in internal controls caused by pressure to increase profits. Although Mr Chen has not been charged with any offence, his remuneration 87 per cent of which was linked to profitability is also seen by some analysts as a powerful incentive for the chief executive to have pushed the company beyond its limits.
In this view, the CAO scandal is similar to western collapses such as Enron and WorldCom in the US and Parmalat in Italy, in which corporate hubris and disregard for shareholders led powerful managers down a reckless course.
Chen Feng, chairman of HNA, one of China's four leading airline groups, is outraged by the idea that the case could undermine confidence in Chinese companies. “This kind of thing does not just happen in China,” he says. “I'm sure there are as many problems in western stock markets, but they just take a different form.”
Others, however, believe China's breed of private-public giants is plagued by structural problems, typical of a country in transition between communism and capitalism.
He Jun, analyst at Anbound Group, a Beijing-based consultancy, says government shareholders' inability to put effective limits on the power of state-owned enterprise (SOE) managers has become the most pressing problem facing the sector.
“What happened at CAO is very representative,” says Mr He. “This kind of problem is still very common among SOEs.” He adds: “This company looked just like a normal, listed company from another country would. But in reality, in terms of corporate governance, it was just like an old-style SOE.”
From a similar stable came the Hong Kong-listed arm of Bank of China, whose board was purged amid scandals last year; China Life, the insurer whose US$3.4bn initial public offering is being investigated by US regulators; and China National Cotton Reserves, which last week revealed that wrong bets on cotton prices cost it Rmb500m ($60m). For foreign investors, the parent company's ambiguous response to, and ultimate failure to avert, CAO's collapse erodes a big attraction of SOEs. A Hong Kong-based fund manager says: “We used to think listed SOEs were a one-way bet because the state would bail them out before they collapsed. After CAO, that is no longer true.”
China's corporate governance has improved enormously in recent years HNA's Mr Chen describes it as “using one year to make a decade's progress”, especially among listed companies.
According to the Asia Corporate Governance Association, “for Hong Kong-listed state-owned . . . enterprises corporate transparency and investor communication have generally continued to improve” in 2003-04.
Nevertheless, senior officials are aware of the need for further reform.
An important move would be to turn Sasac set up by the government in 2003 with the goal of “separating ownership from management power” into an effective watchdog. According to state media, Sasac is seeking to develop a system providing for the potential dismissal of state managers responsible for big losses a basic in most developed markets.
But critics say Sasac is more interested in its expanding its influence on policy within the government than in the less glamorous work of policing the behaviour of state companies. “Sasac has not yet become the real boss of the SOEs,” says a China analyst.
That view has been reinforced by its anaemic response to the CAO collapse. A January 13 speech by Li Rongrong, Sasac chairman, at a national conference on state asset management posted on the agency's website, contained not a single mention of CAO.
With China preparing for its hardest equity sale yet the privatisation of its huge and troubled state banks this seemingly head-in-sand attitude threatens to reduce international confidence in its regulatory environment.
Mr Lee, these days Singapore's minister mentor, argues that Beijing's decision to send Mr Chen back to the city state he had fled after the scandal erupted is encouraging.
“To me, that signals that they understand the damage that it will do them internationally if the chief executive just absconds,” he says. “That would reduce them to a third world standard of behaviour.”
Creditors, shareholders and other investors with a stake in China will need more than the elder statesman's words to believe CAO was an isolated excess rather than a symptom of a widespread malaise afflicting China's aspiring corporate champions.
解析中航油丑闻(下)
在用了2亿多美元现金支付追缴保证金(弥补亏损所需缴纳的额外资金)之后，中石油接着就做了中国国有控股企业投资者意料之中的事：向母公司求助。
但中航油集团非但未将自己的资金注入中航油，反而以1.96亿新元的价格出售了中航油15%的股份。据陈久霖的宣誓声明称，这相当于按该股当时的市价提供14%的折扣。
陈先生表示，这次股份配售是“为追缴保证金筹资”，配售所得资金被贷给了中航油。
母公司出售15%股份
但当时在证交所声明中，中航油并未说明这次出售的原因，而彭博社(Bloomberg News)曾引用公司一名官员的话说，那是母公司在为“它们正进行的一项投资”筹集资金。
中航油集团可能在股票配售时就已知道中航油的交易亏损，根据新加坡《证券期货法》(Securities and Futures Act)，它可能因此面临内幕交易的指控。
尽管当时中航油保持沉默，但在新加坡相互熟识的石油交易商中，已开始盛传该公司出现交易亏损。11月，焦虑的债权人要求与中航油管理层会晤。
债权人表示，当时中航油向他们保证说，母公司已向中国国家外汇管理局(State Administration of Foreign Exchange)提出申请，以允许它将约1亿美元资金转入中航油。
日子一天天过去，纾困承诺却一直没有履行，债权人被告知，此事已被提交中国国有资产监督管理委员会(Sasac)，这是主管国有企业的中国政府机构。
债权人采取行动
由于国资委推迟作出决定(可能是为了调查损失状况)，债权人之一的“南非标准银行”(Standard Bank)决定不再等待。
11月17日，它致函中航油威胁说，如果该公司到12月9日还不偿还所欠的1400万美元，它将启动清算程序。
限期逐渐临近，国资委仍然没有同意注资计划，中航油集团自己向中航油发出致命一击。11月24日，这家母公司拒绝批准中航油的一项计划，中航油原计划贷款3.62亿新加坡元，收购新加坡石油20.6%的股权。这也就是陈先生在飞机上向李先生游说(未果)的交易。
没有母公司的支持，中航油面对债权人的催讨，不得不在一周后寻求法院保护。
内控机制失灵
一些人认为，中航油的破产完全是内控机制失灵的结果，这种失灵是由提高利润的压力所致。尽管陈先生始终未被指控犯有任何罪行，但一些分析师认为，他报酬的87%与公司赢利挂钩，那是导致这位首席执行官把公司推到安全界限以外的一个强烈动机。
依照这种观点，中航油丑闻与美国安然(Enron)、世通(WorldCom)，以及意大利帕玛拉特(Parmalat)等西方企业的崩溃相似，在这些丑闻中，公司的傲慢自大和对股东的漠视导致强势管理者鲁莽行事。
有观点称，这起案件可能损害人们对中国公司的信心。中国四大航空集团之一“海南航空”(HNA)董事长陈峰对此忿忿不平。 “这种事并不仅仅发生在中国，”他说，“我确信西方股票市场也有这么多问题，只是问题的形式不同。”
大型上市国企的结构性问题
但其他人认为，中国的大型上市国企受到结构性问题困扰，这种现象在一个从计划经济向市场经济转型的国家中很典型。
北京咨询公司“安邦集团”(Anbound Group)分析师何军说，政府股东无法对国有企业管理者的权力进行有效限制，这已成为国企行业面临的最紧迫问题。
“中航油所发生的事很有代表性，”何先生说，“这种问题在国有企业中仍然很普遍。”他补充说：“这家公司看上去和其他国家正常的上市公司差不多。但实质上，就公司治理而言，它就像一家老式的国企。”
还有一些与中航油类似的公司，其中包括中国银行(Bank of China)在香港上市的子公司，其董事会去年因一些丑闻被整顿；保险商中国人寿(China Life)，其34亿美元的首次公开发行正受到美国监管机构的调查；此外还有中国储备棉管理总公司(China National Cotton Reserves)，该公司上周披露说，由于对棉花价格走势判断错误，它损失5亿元人民币(合6000万美元)。对外国投资者来说，母公司对中航油的破产反应暧昧而且最终未加以避免，这令中国国有企业的吸引力大减。一位驻香港的基金经理说：“我们过去认为，对中国国企下注万无一失，因为国家会在它们倒闭前施以援手。在中航油事件后，这种观点再也不成立了。”
最近几年，中国企业的治理状况大有改善，上市公司尤其如此。海南航空董事长陈先生将其描述为“一年取得十年的进步”。
按亚洲公司治理协会(Asia Corporate Governance Association)的说法，在2003-04年度，“在香港上市的国有……企业的公司透明度和投资者沟通整体上持续改善”。
但高级官员意识到，有必要进行进一步改革。
“国资委尚未成为国有企业的真正老板”
重要举措之一是将国资委变成一个有效的监管机构。该委员会于2003年由政府成立，目的是“将所有权与经营权分开”。据国家媒体报道，国资委正寻求发展一套制度，规定如果国企业经理对大笔亏损负有责任，就有可能被解雇。这在大多数发达市场是一个基本规定。
但批评人士表示，与监督国有企业这一不太风光的工作相比，国资委对于扩大自己对政府内部决策的影响力更有兴趣。“国资委尚未成为国有企业的真正老板，”一位中国分析师说。
国资委对中航油的崩溃反应平淡，强化了上述观点。国资委主任李荣融1月13日在全国国有资产管理会议发表讲话，其中只字未提中航油事件。该机构的网站上刊登了这一讲话。
中国正在筹备迄今为止最艰难的股票发行，即让其陷入困境的大型国有银行私有化。在这样的背景下，这种看来像是逃避现实的态度，可能有损于国际上对中国监管环境的信心。
新加坡内阁资政李光耀认为，中国政府将陈先生送回新加坡的决定令人鼓舞。陈先生在丑闻爆发后逃离了新加坡。
“在我看来，这表明他们理解，如果这位首席执行官就这样逃脱罪责，那将会损害他们的国际声誉，”他说，“那会使它们降至第三世界的水准。”
解析中航油丑闻(上)
阅读
不过，单凭这位老政治家的几句话，并不足以让债权人、股东和在中国有利益的其他投资者相信，中航油事件是一次孤立的违规行为，而不是一种痼疾的症状，这种痼疾普遍困扰着抱负远大的中国“冠军企业”。
