Economy, Talking Point

All hands to the pump

CNPC in crisis mode, after series of arrests purge top managers


In the public eye: CNPC executives are the focus of a corruption probe

Daqing and Shengli, China’s largest oilfields, used to produce some of the Chinese Communist Party’s most respected public servants.

Braving bitter cold, Wang Jinxi, a model official nicknamed ‘Iron Man’, became a legend in the fifties by throwing himself into pools of mud and cement to safeguard oil wells.

Wu Chuangching, another team leader, broke his skull in one time-saving but dangerous manoeuvre. After recovering from his coma, Wu is then said to have professed: “The work is more important. Please tell my comrades not to waste time coming to see me.”

Revolutionary spirits like these – real or imagined – more than compensated for China’s inexperienced and under-equipped oil pioneers. And defeating the odds, discoveries were made at Daqing and Shengli where foreign experts said there was little prospect of finding oil. When both fields began gushing in the 1960s, the petroleum industry provided some of the sole growth for an economy that had virtually ground to halt with the onset of the Cultural Revolution. Hence China’s oldest oilfields weren’t named after specific places but festive moods. Daqing implies “big celebration”; Shengli means “victory”.

Shengliren [or Shengli people] have certainly made a remarkable contribution to our country,” wrote Zhou Yongkang two years ago in a piece for the China Petroleum Daily that celebrated the 50th anniversary of Shengli’s discovery. The observation carried weight. At the time Zhou was one of the nine members of the Politburo’s Standing Committee, making him one of the most powerful men in the country (he stepped down last November). Zhou evidently took pride in being a Shengliren himself. He spent over 30 years in the oil industry, including a decade as general manager of oil major CNPC (the parent of PetroChina) and later its Party chief. He was also the most prominent of the Shengliren to rise to a position of influence in Beijing. Others followed, thanks to their affiliation with China’s most powerful corporate empire. Even today, CNPC is China’s biggest taxpayer, equating to more than 3% of government spending.

But the mood among Shengliren this past week has belied their name. The ‘men of victory’ have experienced an astounding political defeat. A flurry of senior executives – most of them from CNPC and old boys from Shengli – have been arrested on corruption charges.

The purge is rattling investor confidence in the company, as well as the oil sector. It is also adding to the high-octane struggle surrounding former Chongqing Party boss Bo Xilai. Coming just days after Bo’s trial (see WiC206), many now wonder if a scalp even bigger than Bo’s might be possible. It’s rumoured that Zhou is being investigated too, in what could be the next step in President Xi Jinping’s anti-graft drive.

Who has been arrested so far?

Since taking over the leadership, Xi has vowed to crack down on “tigers” and “flies” (meaning both senior and junior offenders) in his anti-corruption fight.

But things began rather peripherally for the Shengli faction. For example, when a deputy Party chief in Sichuan was detained in December, there wasn’t major alarm. But then a retired deputy governor of the same province was arrested in June.

Why was this noteworthy? Both officials worked under Zhou Yongkang in Sichuan, where he’d spent three years as Party chief before becoming head of China’s public security apparatus in 2002.

A bigger trap was looming for the Shengli gang. On the last Monday in August news broke that a vice president at CNPC was being investigated for serious disciplinary violations.

A day later, the Party discipline watchdog said three more senior executives of PetroChina had been arrested for the same reason. Then came the biggest catch so far. Jiang Jiemin, who had only just become the director of Sasac – the hugely influential regulator for over 100 major state-owned enterprises including CNPC – was detained at the weekend and then almost immediately sacked.

Jiang served as chairman of CNPC from 2006 until March this year. Like most officials caught up in the probe, he worked under Zhou at CNPC. For an incredulous Chinese media, the Shengli faction was suddenly in the spotlight.

How powerful was the Shengli faction?

Erica Downs, a fellow at the Brookings Institution, has studied the group and how it became so influential, reaching its apex when Zhou was elevated to the Standing Committee. It had been no slouch before, mind you: its alumni numbered a Chinese vice president, two vice premiers and at least 12 municipal chiefs.

Those with the closest ties worked at the Shengli oilfield before it was transferred from CNPC to Sinopec in 1998. A particularly key time in tracking the faction’s membership, Downs says, is the period between 1988 and 1996 when Zhou was the company’s figurehead.

“A rule of thumb is that anyone above the director level at CNPC who worked at Shengli was promoted by Zhou,” an insider told Downs, in remarks published in a 2010 paper titled Business Interest Groups in Chinese Politics: The Case of the Oil Companies.

Whilst the Shengliren would once have brooked no criticism of their probity, the media now seems to have been let off the leash to denigrate the faction.

“The members of the so-called Shengli gang have disgraced the word Shengli, the glories and the dreams of several generations of oil workers,” the Guangming Daily proclaimed bluntly. The “earthquake” at CNPC, it concluded, is “an unprecedented crackdown on tigers”.

What has the Shengli faction done wrong?

At this point all we know for certain are the accusations of corruption and “infringement of Party rules”.

State media has not detailed the specifics.

But there have been a few leaks. Citing insiders close to Party discipline watchdogs, the 21CN Business Herald said the probe on Jiang Jiemin centres on his role at CNPC. It has been alleged that the investigations relate to foreign acquisitions agreed by Jiang, with “enormous embezzlement of funds”.

“Some overseas acquisitions that cost multi-billions of US dollars were supposed to be quality assets but turned out to be poor once CNPC had splashed the cash,” an insider told 21CN.

In China itself, the opposite was said to be the case. “Some supposedly lacklustre oilfields sold by CNPC gushed oil once in the hands of private firms,” the newspaper said.

Also being noted: the Shengli faction’s tangled web of interests involving Bo Xilai.

Under Jiang, according to 21CN, CNPC invested in massive refineries located in Bo’s fiefdoms. Much of the new capacity was commercially unnecessary, says the newspaper, but the investments helped to boost Bo’s profile.

“Jiang pushed for new refineries in Liaoning when Bo was the governor and when Bo went to Chongqing, Jiang did the same trick,” insiders told the 21CN.

Century Weekly was a little more cautious in examining Jiang’s wrongdoings but inferred that he has been caught up in higher level feuds. Jiang’s case involves “sensitive issues as reported by rumours and overseas media”, the magazine said, including “emergency movements of CNPC’s funds” and his “mysterious disappearance from the public eye last September”.

Are earlier rumours turning out to be true?

Last year the foreign press seized on a stream of seemingly unconnected gossip about a failed military coup, a fatal Ferrari crash (that ended a political career) and at least two internet blackouts (said to be designed to halt the flow of sensitive information).

The rumour mill started with Bo’s arrest in March and it kept up a heady pace until Beijing’s once-in-a-decade leadership change last November. The events of the past week have reignited speculation that some of the gossip may have had had more substance than initially thought.

Bo was officially arrested on March 15 last year. Just days later, there was talk of a failed coup in Beijing. Netizens said they heard gunshots (see WiC145) and the mainstream foreign media wrote about the unconfirmed reports, some of which claimed Zhou Yongkang was staging a final stand following the sacking of his close ally Bo.

“China coup rumours may be wild but tension is real,” the Los Angeles Times wrote at the time. Censors then stepped in to impose a two-week blackout on the comment functionality of all weibo micro-blogging accounts.

While the coup talk remained unconfirmed, another strange happening is now gaining more credence, following Jiang Jiemin’s arrest.

Remember the speeding Ferrari Spider that crashed in Beijing on March 18 last year? The young driver and two half-naked girls were killed in the accident. Netizens speculated furiously that the driver was the son of a political heavyweight. Censors swiftly blocked online searches for the news (see WiC151).

It wasn’t until September that the fuller circumstances surrounding the crash started to be revealed. The South China Morning Post reported that the driver was Ling Gu, the son of Ling Jihua, a close protégé of then President Hu Jintao. The news, according to the New York Times, was a game-changer as exposure of the crash ended Ling’s chances of getting onto the Standing Committee and put new leader Xi Jinping in a stronger position vis-à-vis his predecessor.

Perhaps this explains why painstaking efforts were initially made to cover up the Ferrari crash. A fake message sent from the son’s weibo sought to persuade media he was still alive, while the South China Morning Post reported that CNPC was alleged to have helped in channelling millions of dollars to the families of the girls to make sure they kept quiet.

Then the chairman of CNPC Jiang Jiemin disappeared for nearly a month, skipping a PetroChina board meeting.

Century Weekly notes: “As CNPC’s top dog, Jiang has much power and could channel huge amounts of money. But he could also be in a difficult position when connected people come calling”.

“Probably that’s when he did something he shouldn’t have done.”

So what’s next for PetroChina?

Like the rest of us, investors in CNPC’s listed unit are finding it difficult to grasp the complexities of Chinese politics. “Some strange business is going on,” admitted The Barrel, a website run by petrochemical research house Platts, although the loss of four senior officials at China’s biggest state oil firm was “still shrouded in mystery”, it said.

One reaction was to dump PetroChina’s stock and its share price fell more than 4% the day after Jiang’s arrest was made public. Kunlun Energy, its gas distribution unit, plunged 13% and the selling took nearly $3 billion off the market capitalisation of CNPC’s listed units.

Many observers drew comparison to a scandal in 2007, when Sinopec’s then chairman Chen Tonghai was sacked for taking bribes. But the intensity of the crackdown on CNPC is unprecedented, with so many names now in the fray. One of the sacked officials, for example, had only just been promoted to the board of PetroChina (he held office for a mere 25 days).

How about the broader context? The SCMP said the graft probes may prove to be the “trigger point for the long-promised break-up of state monopolies”. Meanwhile, Reuters reckons that PetroChina will be forced into pursuing a new strategy. Rather than “spending like crazy” and taking on deals “with questionable economics”, Reuters expects the oil giant to become more choosy in focusing on “large-scale and quality projects”.

And what of its rival, Sinopec? With CNPC now desperate to stay out of the headlines, its rival has just launched its official weibo (see page 7) in a bid to appear more transparent. And in another move to court public opinion, Sinopec announced last week that it will be ahead of schedule in adhering to cleaner fuel standards.

What’s next for the Shengliren?

All eyes are now on whether Zhou Yongkang, the faction’s figurehead, is heading for criminal charges too. Certainly, netizens are wondering whether Xi’s campaign could net the biggest tiger yet. “For more than a year they said Master Kang would be taken down from the shelves, so why is Master Kang still there?” one weibo user quipped, likening Zhou Yongkang to a popular instant noodle brand in a bid to evade the censors.

Speaking more freely, Hong Kong’s Mingpao newspaper called for Xi Jinping to honour his word in declaring war on corruption. “Will China become another Russia, where a handful of people fill their pockets with state-owned assets? This is no longer a purely hypothetical question,” the editorial urged.

Political taboos are also being brought into question. Since the Cultural Revolution, no members of the Politburo’s Standing Committee (current or retired) have ever fallen to an anti-graft probe. Could that unspoken rule be broken?

There might be more clarity when the ruling Party’s Central Committee meets for its third plenary session in November. This is traditionally an important gathering and there is speculation that Xi will take the opportunity to announce a new roadmap for reforms.

On the economic front it is thought his prime minister Li Keqiang favours a more laissez-faire approach, with a preference for greater competition and entrepreneurial initiative. So some analysts see the attack on CNPC as signalling the crumbling influence of those factions that support state-led capitalism and its investment-driven model.

But the Apple Daily says that no one really knows whether “the purge on CNPC is about economic reform or a political feud”. Either way, it could signal dramatic changes ahead. Who else might get drawn into the political crossfire, for instance? And might Xi and Li contemplate selling the government’s controlling stake in some of these powerful firms? That would be a bold move – possibly bolder than the two men would like – but how else to transform these entities from political fiefdoms into more conventional companies?

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