For a brief period two years ago, Porsche lost the appearance of a carmaker and began to look a lot more like an institutional investor. In an attempt to take control of Volkswagen, it engaged in all kinds of financial engineering, forcing some major counterparties to shoulder massive losses.
In fact, Porsche was so successful some quipped that it had become a hedge fund with a car business attached. (That didn’t last forever, though – a year later it had racked up so much debt that Volkswagen was able to absorb its rival in a merger).
But Chinese oil-giant PetroChina will be hoping that some of Porsche’s initial luck rubs off, as the company makes its first steps into the world of finance too.
In April, PetroChina bought Karamay Commercial Bank, located in Xinjiang in the northwest of China. It renamed the company “Kunlun Bank” and started work on setting up a branch in Beijing. Additional domestic branches will be located in areas where PetroChina extracts resources, such as Daqing and Changqing. There will also be international branches too, in Kazakhstan and Sudan.
But the Kunlun financial brand doesn’t stop there: in July, PetroChina bought an 82% stake in Ningbo Golden Harbour Trust, a trust company with registered capital worth Rmb3 billion ($439 million). It was promptly restyled as the “Kunlun Trust”.
PetroChina is leading the way in what could become a significant trend for China’s state-owned enterprises (SOE): the integration of financial companies into the industrial base. Other oil companies, such as Sinopec and CNOOC, are also interested in getting into the finance industry, according to China Business News. So too are SOEs like the State Grid Corporation and Minmetals Group.
While there is a precedent for this kind of relationship in the private sector – Liu Yonghao, the billionaire founder of the New Hope Group has a substantial stake in China Minsheng Bank – the government has generally disapproved of state firms attempting to expand into the financial realm. Korea has a similar attitude towards its conglomerates, the chaebol. These private companies are forbidden from owning banks, as the government thinks it can distort credit allocation and create conflicts of interest.
China’s standpoint seems to be softening. Li Wei, the deputy director of the government body that manages SOEs, Sasac, said last year that combining industrial companies with their financial counterparts could become an important way for big state firms to cultivate international competitiveness.
But critics say that bringing banks into the industrial fold will encourage companies to take financial risks that they can’t manage. A number of state companies have run up heavy losses on derivative contracts, after all. As an example, China Business News cites Citic Pacific, which in 2008 lost $2 billion due to currency hedges that went wrong.
Nevertheless it will be a trend to keep an eye on in 2010.
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