Corporate Corruption Drive Moves To State Firms

PetroChina officials fall victim in anti-graft campaign

An anti-corruption drive centered on firms in China is quickly moving into the state-run sector, with word of a major probe at PetroChina (HKEx: 857; Shanghai: 601857; NYSE: PTR) that has snared some of the oil giant’s top executives. Before I go any further, I need to admit that this new twist shows that I was wrong in my earlier observation that the growing wave of anti-corruption probes was mainly targeted at foreign firms. I still contend the campaign began with foreign companies, which are generally easier targets for Chinese investigators; but now the clean-up appears to be spreading into the much larger state-run sector, where investigations are much more difficult because many suspects are protected by their vast networks of government and other connections, known as guanxi.

From a big-picture perspective, this new direction in the anti-corruption drive certainly looks encouraging, as these big state-run firms are probably far more guilty of corruption than many of the foreign companies that have also come under scrutiny. This new direction sends the message that President Xi Jinping is quite serious about addressing the problem of corruption and corrupt officials that is rampant in China, and that no one in any position is safe from investigation. That should send a powerful message into the corporate world where this kind of clean-up is badly needed.

All of that said, let’s take a look at some of the details from this latest PetroChina probe, which the company considered big enough news to request a suspension of its Hong Kong-listed shares. Altogether 4 top officials are now under investigation for various breaches of discipline at PetroChina and its parent, China National Petroleum Corp (CNPC).  (company announcement; English article)

In its official announcement, PetroChina said the 3 latest officials under investigation include vice presidents Li Hualin and Ran Xinquan and chief geologist Wang Daofu, all of whom have resigned from their posts. In a separate but almost certainly related development, CNPC Vice President Wang Yongchun was also put under investigation and resigned from his post earlier this week.

This investigation follows another one last week that saw a top official at China Mobile (HKEx: 941; NYSE: CHL), another massive state-run firm, come under investigation for suspected corruption. (previous post) Before the China Mobile and now the PetroChina probes, most of the major anti-corruption investigations over the last 2 months had been directed at foreign companies in the pharmaceuticals sector. The first to come under attack was Britain’s GlaxoSmithKline (London: GSK), which was followed by similar attacks on Novartis (Switzerland: NOVN), Sanofi (Paris: SAN) and Eli Lilly (NYSE: LLY).

In my view, this sudden new twist in the anti-corruption campaign sends a much more powerful message than the earlier investigations against the foreign firms. Most average Chinese are all too aware that corruption is rampant in most of the nation’s biggest state-owned firms, where officials use their positions to take bribes and accept other gifts to benefit themselves and their friends and relatives.

Many foreign companies have adopted similar corrupt practices, usually on a lesser scale, because they realize there’s no other way to do business in China. But by attacking those companies, Beijing was really only dancing around the periphery of the central problem of rampant corruption at most big state-run firms. This kind of anti-corruption probe against officials at big state-run firms isn’t really new, as we’ve seen similar actions in the past. But in the context of Xi’s recent anti-corruption campaign, I would certainly expect to see a lot more similar probes in the months ahead, toppling more top officials at some of China’s biggest state-run firms.

Bottom line: New probes targeting top officials at PetroChina show Beijing is turning its sights to big state-run firms in its anti-corruption drive.

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