State Capitalism and State Owned Enterprises. A
Case Study of the Chinese Energy Sector
Author: M.W. Vos Student Number: 6056679
Supervisor: Prof. J.W.J. Harrod Second Reader: P.W.H. Aarts
Master Thesis Political Science International Relations
Seminar: The Political Economy of Trade and Investment: The Global Politic of Corporate Sectors
Table of Contents
1. Introduction p. 4
2. Theoretical Framework p. 8
2.1. State Capitalism p. 8
2.1.1. A New Type of State Capitalism p. 10
2.2. Surplus Maximization p. 14
2.3. Summary p. 17
3. Research Methods p. 19
4. The Evolution of the Chinese Petro Sector: ‘Going Out’ p. 22
4.1. Summary p. 26
5. Foreign Investments by Chinese NOC’s p. 27
5.1. Energy Backed Loans p. 33
5.2. The Middle East p. 37
5.2.1. Iran p. 38
5.2.2. Iraq p. 40
5.2.3. Saudi Arabia p. 42
5.3. North America p. 43
5.4. Summary p. 46
6. Who Runs Chinese SOE’s p. 48
7. Conclusion p. 52
8. Bibliography p. 55
List of Abbreviations
AEIA: American Energy Information Agency BP: British Petroleum
CDB: China Development Bank CEB: China Exim Bank
CCP: Chinese Communist Party
CNPC: China’s National Petroleum Company CNOOC: China’s National Offshore Oil Company EBL: Energy Backed Loan
IEA: International Energy Agency
MFO: Chinese Ministry of Foreign Affairs MOFCOM: Chinese Ministry of Commerce MPI: Ministry of Petroleum Industry NOC: National Oil Company
PLA: People’s Liberation Army PRC: People’s Republic of China SOE: State-‐Owned Enterprise SPZ: Special Economic Zone
TPAO: Türkiye Petrolleri Anonim Ortaklığı SWF: Sovereign Wealth Fund
WEC: World Energy Council
1.0 Introduction
The rise of China as an economic super power has been a hot topic for international scholars over the past three decades. The reforms that Deng
Xiaoping started in the 1980s have brought the People’s Republic of China (PRC) unprecedented growth figures and reestablished China as a global power and goes hand in hand with China’s relentless appetite for natural resources. Especially the hunt for energy resources is important here, as many scholars have already argued that it could be driving China’s foreign policy (Zweig and Bi, 2005; Leverett and Bader, 2005; Dorraj and English, 2012). China’s energy resource security is not only important to continue its economic growth, but is also key too the survival of the Chinese Communist Party (CCP). This is due to the fact that the economic growth of the last decades has become the
cornerstone of China’s social stability (Zweig and Bi, 2005). Taking this into account it can be argued that most of the policies that are implemented by the CCP are driven by the strategic economic interest of the state.
The reforms that Deng Xiaoping started in the 1980s have opened-‐up the Peoples Republic to the rest of the world. The Foreign Direct Investments
flowing into the country skyrocketed from USD 430 million in 1982 to 253,5 billion in 2012, while the US did not even passed the 200 billion mark in 2012 (World Bank, 2014). With the investments of foreign businesses in China it became clear that for China’s state-‐owned enterprises (SOE’s) to be compatible on the international market, entire economic sectors and business structures of the SOE’s had to be reformed (Zhang, 2004). The market reforms that where started in the 1980s accelerated with the implementation of the Zǒuchūqū
Zhànlüè policy or ‘going out’ policy by the Ministry of Foreign (MFA) in 1999.
The arrival of foreign companies in China presented the CCP with the opportunity to experiment with different strategies in different sectors (Zhang, 2004). These pressures from international markets and the development policy of the CCP put a heavy burden on the SOE’s, but also provided new opportunities. It provided them with access to new technology and management techniques, but also access to the much-‐needed capital to modernize the Chinese economy and especially modernize the organization of the different economic sectors. For
example, until the end of the 1980s the Chinese petrol sector was basically acting like a ministry. It was the China National Petroleum Company (CNPC) who
determined the production quotas and set the price for every product that was produced within the Chinese petroleum sector (Nolan, 2002). In short the companies within the Chinese petro sector did not show any resemblance with the western businesses on the international oil and gas markets. This changed in 1990s when the CCP started to reform its three major national oil companies (NOC’s) CNPC, China National Offshore Oil Company (CNOOC) and Sinopec with the large international petro companies of that time, like Royal Dutch Shell, Exxon, British Petroleum (BP) and Mobil set as examples. As the reforms were rolled out the Chinese NOC’s started to show some resemblance with the private international petro companies, but it was only in 1997 that the CNPC was
completely cut loose from its ministerial responsibilities (Zhang, 2004). Even after the reforms of the 1980s and 1990s all petro companies in China are still state-‐owned. This is part of a strategic long-‐term policy choice by the CCP, that Ian Bremmer calls state capitalism (2010: 50). With state capitalism markets are used as a tool that serve national interest, or the interests of the ruling elites, and not as an engine of opportunity for the individual (ibed). In short, the state uses markets to extend political and economic leverage, both on the domestic and the international stage.
Although Bremmer sees China as the best example of state capitalism on the international stage, there are some problems with his assumption. This is where the state-‐led market reforms come in to play, because it seems that these reforms have led to more freedom for SOEs within the domestic and on the international stage than the CCP can control (Downs, 2011; Song et al, 2011). As the market reforms within China go hand in hand with sectorial and corporative reforms, Chinese SOEs are starting to behave more like other (i.e. western) enterprises. This means that surplus maximization has become a vital part to the goals of the SOEs (Downs, 2011; Zhang, 2004).
When considering the international investment of Chinese SOEs the strategy of state capitalism, on the one hand, and the goal of surplus
maximization, on the other, raises multiple questions. Are foreign investments maid by Chinese SOEs driven by the foreign policy of the CCP? If so, what kind of
control does the CCP has over its SOEs? If not, are Chinese SOEs becoming more independent? And therefore, do these SOEs operate more and more like private enterprises? Or, and this would be even more interesting, are SOEs using the state capitalism that the CCP promotes to their own advantage? As of yet the available literature on this topic supports rather one ore the other. Bremmer states that it is state capitalism all the way, while others like Downs and Zhang state that normal (i.e. western) business strategies are now central to Chinese SOEs to achieve their goals (surplus maximization). Energy security is one of the major concerns of the CCP to continue the economic development of China and the fact that the foreign investments portfolio’s of the CNPC, CNOOC and Sinopec are among the biggest in China, it seems that the energy sector and especially the petroleum and natural gas sector are most suited to answer the questions
mentioned above. The research question for this thesis is therefore as follows:
What drives foreign direct investment of SOEs in the energy sector?
This question becomes even more interesting if current developments on the international petro market are taken into account. In 1993 China became a net importer of petroleum and by November 2013 China surpassed the U.S. as the largest net importer of petroleum (EIA, 24-‐03-‐2014). This rapid development is especially remarkable if it is taken into account that the first foreign investments made by a Chinese NOC’s occurred in 2002(IEA, 2011). Most of the investments by the NOC’s since then were made in resource rich developing countries, but since 2010 Chinese NOC’s started to successfully invest in American and Canadian companies. At the same time the China Development Bank (CDB) started to provide so called energy backed loans (EBL’s) to developing countries in Africa, Asia and Latin America. Due to the economic crisis of 2008 China was one of the few actors on the international market that could provide countries with long-‐term loans (Dorraj and English, 2012). The EBL’s provided the
receiving countries with the much needed capital, while China secured the inflow of energy resources as these loans are paid back by supplying these resources to China. This gave the Chinese NOC’s a competitive advantage over other
investments made by the CNPC, CNOOC and Sinopec. With these developments in mind the 2008 economic crisis was the start of a tremendous increase of foreign investments made by the Chinese NOC’s (IEA, 2011).
Another major development within the international petro market over the past ten years is the retreat of the US out of the Middle East (Dorraj and English, 2012). The Americans did not only pulled out of Iraq in 2009, the American government also decided to explore shale oil/gas and oil sands and therefore become less dependent on oil imports (Swint, 2014). British Petroleum (BP) stated that ‘the US will be able to provide for all its own energy needs by 2035 as output of shale oil and gas accelerates and demand growth slows’ (Ibed). With the diminishing role of the US in the Middle East, China has started a new strategy that has been called the New Silk Road (Shah and Reed, 2012; Tiezzi, 2014). For the states in the Middle East the New Silk Road comes as a blessing, because the governments feared that the shift of the strategic interest in the US could be harmful to the region as U.S. investment in the region would decline (Shah and Reed, 2012).
As the purpose of this thesis is to find the strategies that are behind the foreign investments of Chinese SOEs it will contribute to a broader explanation of the behavior of SOEs and the CCP in other economic sectors that are
strategically vital for the further development of China. This is true for sectors that involve natural resources, other than energy resources, and maybe even for sectors with heavy involvement of People’s Liberation Army (PLA) the MFA. However, this is probably not the case for sectors that are involved in assembling final products, clothing and other sectors, as these are strategically less
important to the CCP.
This thesis is organized as follows. The second chapter will outline the theoretical framework. The third chapter will explain the research methods that have been used to construct this paper and will operationalize the concepts of state capitalism and surplus maximization. The fourth chapter presents the research findings concerning the foreign investments of Chinese NOC’s. The fifth chapter compares the findings presented in this thesis with findings made by other authors concerning the foreign investments of Chinese SOE’s. The sixth chapter concludes this thesis.
2.0 Theoretical framework
This thesis will make use of two different theories to help explain the strategies of the CCP and the NOC’s: state capitalism and surplus maximization. The concept of state capitalism helps explaining how the CCP would likely be using SOEs and their investments abroad to reach their foreign policy and economic goals. However, as has been already described above the strategies of SOEs could also be driven by normal (i.e. Western) corporate strategies. To help explain findings other than related to state capitalism surplus maximization will be used in this thesis.
2.1 State Capitalism
The concept of state capitalism is definitely not new; it has been used throughout the history of Marxism, socialism and anarchism. The term can be traced back to Jan Waclav Machajski, he claimed in 1905 that socialism was a movement of the ruling elite(s) that would result in a new type of society, which he called state capitalism (The Economist, 2012: 3). The concept is mainly focused on state activity within a capitalist framework and by this standard has been around since the dawn of capitalism, although not specifically by this name. On a
scientific level Marxists, anarchists, liberals, realists and many others have used the concept and as there are many scholars there are many definitions of state capitalism.
Anton Pannekoek stated that the term state capitalism, before the Second World War, was frequently used in two different ways. On the one hand, it was used to describe ‘an economic form in which the state performs the role of the capitalist employer, exploiting the workers in the interest of the state’, on the other hand it was used to describe a system ‘under which capitalist enterprises are controlled by the state’ (Pannekoek, 1937: 1). Pannekoek’s definition of state capitalism is very basic and is still completely based on Marxist literature. After the Second World War scholars started using state capitalism to understand and
describe the economies of the third world (Petras, 1977, Dupuy and Truchil, 1979; Frieden, 1981).
Petras used state capitalism to describe a process, which was set in motion by states to transform an agricultural export society through national industrialization. State capitalism allowed the governments of these states to create an internal market for agricultural products, reduce the power of the landlords, and to mobilize natural resources in a way that they could harness the created surpluses for national development projects (1977: 4). Keeping the process of national industrialization in mind, Petras claims that the import-‐ substitution strategy originate from a state capitalist perspective, which was used in Latin America during the 1950s and 1960s (ibid: 5). State capitalism, in the way that Petras understands it, is a product of a specific historical
conjuncture: the intensification of inter-‐imperialist rivalries coupled with the relative decline of the United States hegemony at that time and the increase of anti-‐imperialists struggles resulting form intensified class struggles within third world societies (Fernandez and Ocampo, 1975; Petras, 1977; Bamat, 1977). However, in the way that Petras, Bamat and Fernandez and Ocampo present state capitalism as a new concept is problematic. The essence of the state in a capitalist society is that it functions to reproduce the conditions for capitalist accumulation (Dupuy and Truchil, 1979: 9). In underdeveloped countries self-‐ sustained capitalist growth is still absent, this means that foreign capital is needed to keep capitalist growth going. This provides states with a problem as ‘[t]he consequences are the relative weakness of domestic capital vis-‐fi-‐vis foreign capital, and the failure of … domestic classes to develop independently of and to compete with foreign capital’ (ibid: 10). As states try to to counter the dominant position of foreign capital within their economies, while keeping the economic growth rates on the same level at the same time, states need to create strong and centralized bureaucracies to sustain capitalist accumulation (Evans, 1976: 139). It is for this reason that an underdeveloped capitalist state is more involved in the economic process than in advanced capitalist states. According to Dupuy and Truchil (1977) authors like Petras and Bamat did not create a new concept, but simply put a new label on a process that can be perfectly explained by the logic of capitalism itself.
Dupuy and Truchil recognized that the states in Latin America had become more active in these respective economies, but during this time the state did not become an autonomous accumulating unit and the bureaucracies did not replace the already existing capitalist classes (1977: 14). Even the nationalization of different enterprises, which according to Petras and Batam is essential for state capitalism, did only occur to decrease investments risks and increase the inward flow of foreign investments (Frieden, 1981: 407).
2.1.1 A New Type of State Capitalism
With the rise of China since the beginning of the 1980s it seems that a more advanced type of state capitalism has been rising as well. The CCP had learned from the failures in Latin America and began experimenting with capitalism on a smaller scale with the first special economic zones (SPZ) in Shenzhen, Zuhai, Shantou, Xiamen and Hainan at the beginning of the 1980s. But the experiment in China with capitalism seems to have its limits (Rickards, 2011). Instead of implementing a form of market capitalism over night, China was one of the first states to choose a path of more gradual reforms. Along with establishing SPZs the CCP also started to reform the business structures of SOEs and used different economic sectors to experiment with different kinds of corporate reforms
(Zhang, 2004). Over time many SOEs were given the opportunity to become privately owned companies. However, there is still a large portion of SOEs that is not allowed to follow the same path. SOEs that operate in economic sectors that the CCP deems vital to the development of China as a modern state are still under firm state control (Bremmer, 2009).
The concept of state capitalism is useful in explaining this process of the limited implementation of capitalism, as it is known in Western countries. The concept it self seems to stem from classical mercantilism (Luttwak, 1993; 1999). Mercantilism was used by European states between the 16th and 18th century to establish government control over a state’s economy for the purpose of
increasing state power at the cost of rival nations (Johnson, 1974). As state capitalism originates form mercantilism it clashes with modern day capitalism. State capitalism is therefore seen as a threat to the free market (Bremmer, 2009).
The way in which, for example, Brazil, China and Russia have used state led development have made Bremmer to believe that ‘[t]he free-‐market tide has now receded. In its place has come state capitalism... This trend has stoked a new global competition, not between rival political ideologies but between competing economic models. And with the injection of politics into economic decision-‐ making, an entirely different set of winners and losers is emerging’ (Bremmer, 2009: 40-‐41). Bremmer is not alone; Rickards for example states that this new development, where corporations are extensions of state power gravely
endangers the world economy today (2011, 149). The 2008 economic crisis has strengthened this view as ‘the crisis of liberal capitalism has been more rendered more serious by the rise of a potent alternative: state capitalism, which tries to meld the powers of the state with the power of capitalism. It depends on governments to pick winners and promote economic growth. But it also uses capitalist tools such listing state owned companies on the stock market an embracing globalization (The Economist, 2012).
The most important difference between state capitalism and
mercantilism is its focus on present day phenomena. State capitalism embraces globalization, to a certain extent the free market and other economic tools that were less important or non-‐existent in the 17th century (Bremmer, 2009;
Rickards, 2011). Also the way scholars used state capitalism during the Cold War to describe the economies of developing countries is not useful for the purpose of this thesis. The way in which Bremmer uses the concept is a good start:
‘governments use various kinds of state-‐owned companies to manage the exploitation of resources that they consider the state’s crown jewels and the create and maintain large numbers of jobs ….. the state is using markets to create wealth that can be directed as political officials see fit …. [and] the ultimate motive is not economic (profit maximization), but political (maximizing the state’s power and the leaderships chances of survival)’ (Bremmer, 2010: 11)
Bremmer uses three different types of companies to explain the functions of state capitalism: national oil (and gas) companies, privately owned national champions, and sovereign wealth funds (SWF). As the Chinese oil sector consists
only of SOEs the privately owned national champions will be disregarded in this thesis. Also the SWF will be kept on the sideline because investments of the NOC’s are not backed by these funds but by national banks like the China Development Bank.
For a state that implements state capitalism a NOC is very important to save guard the future supply of energy resources. In the Middle East every domestic oil and gas company is owned by the state and in Latin America most states have nationalized the biggest former privately owned oil and gas
companies (Bremmer, 2009; 2010). In China the situation is more or less the same. Due to its communist past none of its NOCs were ever privately owned, but the CCP sees these companies as vital to safeguard the development of the state and the economy. Since the 1980s the economic growth in China has become one of the corner stones of social stability. The energy supply towards China is
therefore not only vital to keep its economy growing, it has also become key to maintain the power position of the CCP (Zweig and Bi, 2005). State capitalism is therefore a system that states can use to keep control of their economy, to make sure that it serves national interest and to keep the status-‐quo (The Economist, 2012). This is different compared to, for example, crony capitalism, which is driven by the goals of the ruling elites. State capitalism is not solely driven by self-‐enrichment of state elites, but first and for most of keeping the ruling elites in power with as little social turmoil as possible (Alicica and Tarko: 359). This does not mean that self-‐enrichment is not occurring in China, but it is not the highest goal of the CCP leaders. This also explains the fight of the central government against the heavy corruption in lower government levels, as the central government clearly sees this self-‐enrichment as a threat to the political survival of the party.
What can be witnessed in China is an interesting process were the state implements an economic system that is based on the rules of a free market, but keeps control over the sectors that the leaders think are key to the further development of the state and are therefore vital for social stability. The SOEs operate under more ore less normal corporate structures, are often listed at stock exchanges and are fairly open about there yearly business results (Zhang, 2004: 114). But these businesses often hold key positions in domestic markets
and some markets, like the petro market, are completely state-‐owned. What in fact happens is that the state lets these SOEs operate under free market
conditions, which allows these SOEs to operate smoothly on the international market, and reap the profits that are then relocated as political officials see fit. As the gas and oil reserves in China are depleting, it has become key to the foreign policy strategy of the CCP to acquire new gas and oil reserves abroad. As continuing large growth rates of the Chinese economy will be accompanied by tremendous growth rates in China’s demand for gas and oil. It seems that the ultimate goal here is to maximize the state’s power and secure the political survival of the CCP, which depends on the continuing economic growth in China.
In the way that Bremmer uses the concept of state capitalism it is too much focused on being an opposite force towards the free-‐market doctrine. This is not inline with the purpose of this thesis. Another problem is that Bremmer does not give a clear explanation of the international role that SOEs play in the economic strategies of a state. In this thesis state capitalism will be used to explain the behavior of the Chinese state in promoting foreign investments of its SOEs. But what does this mean?
What must be kept in mind is that ‘[governments] use the market to bolster their own domestic position, SOEs help them do this in part by
consolidating whole industrial sectors (Bremmer, 2009: 40). On the domestic level this means that foreign investors always have to cooperate with Chinese (state-‐owned) businesses if they want to, for example, set-‐up a factory in one of the SEZ’s and share its technological knowhow (Chang and Unger, 2009). The international level is different as the Chinese government is not in the position to make such demands. What happens on the international level is that the
government supports its investing SOEs politically. According to Breslin foreign investments by Chinese SOEs are usually supported by investments of other SOEs and by government deals (2011). The CCP uses state-‐owned banks to provide loans to developing countries and uses government development aid policies to secure mostly energy deals in Latin America, Africa, Asia and the Middle East (Breslin, 2011: 1274).
To summarize, it seems that on the one hand the CCP tries to make sure that SOEs can operate effectively on the international market. This is done to
make these SOEs more efficient and to reap the benefits of the international market to its own advantage. However, at the same time the CCP provides these SOEs with a competitive advantage over other enterprises by backing these investments with political agreements, development aid and investments made by other Chinese SOEs that occur around the same time. According to this theory it would mean that Chinese SOEs are not investing according to normal business strategies, but are executing the foreign policy of the CCP. The question remains if this is true, because there are scholars that believe that surplus maximization is driving the investment strategies of Chinese SOEs (Downs, 2011; Zhang, 2004; Breslin, 2013)
2.2 Surplus Maximization
The concept of Surplus maximization is interesting in this case, because its goal is very different than that of state capitalism. The argument made by Downs and Zhang, among others, is that because of the economic reforms in China of the last thirty years, SOEs are behaving more and more like normal enterprises and therefore try to maximize their economic surplus (Zhang, 2004; Downs, 2011). Instead of being an agent of state policy Zhang and Downs claim that Chinese SOE’s, being state banks, NOC’s or other SOE’s, are becoming more and more independent and with this newly gained independence adapt to become proper businesses.
Instead of following the policy set by the CCP regarding foreign
investments it seems that the maximization of economic surplus is becoming more important for Chinese SOE’s. It is therefore necessary to identify which factors determine decisions regarding foreign investments and if these factors play a role in the decision making process of Chinese SOE’s. This also means that the high politics of geostrategic and geo-‐economic strategies have to be
separated from foreign investments maid by Chinese SOE’s. Instead of just focusing on state interest with regard to China’s foreign investments, the commercial interest of the SOE’s come in to play as well. Another important
factor regarding surplus maximization are strategic economic goals as these help to secure the future of an enterprise (Breslin, 2013:1276).
As domestic oil reserves in China are depleting an important strategic economic goals of Chinese NOC’s is securing access to foreign oil reserves in Africa, Asia, the Middle East, and in North and South America. This strategy helps them with securing the abilities of the involved SOE’s to maximize economic surplus in the future. Even if getting access to these ‘new’ reserves is not profitable in the short term, in the long term it is of vital importance that these SOE’s acquire access to foreign reserves to secure the continuation of their business (Breslin, 2013: 1279).
With regard to the commercial interest of Chinese SOE’s, while foreign investments of SOE’s are often supported by diplomatic activities and financial support from state banks, Downs argues that ‘when it comes to choosing where to invest, the companies are almost always in the driver’s seat and the Chinese government .... is often just along for the ride with little idea of the final
destination’ (2007: 48). Brautigam adds to this argument by stating that overall Chinese companies are under no obligation to send back resources to China, but can do whatever it takes to make profits (2009). The same goes for the energy infrastructure projects that Chinese companies undertake in Africa for example. Even though these projects make it easier for China to import resources from those countries not all of it goes to China (Breslin, 2013: 1277-‐1278). This means that if this research would ignore basic profit motives the answer to the research question would be incomplete.
In this thesis surplus maximization can be understand as the
maximization of value surplus: the surplus value of an investment is equal to the return on the capital that a firm invests (Feenberg, 2010: 41). With this
definition the goal of a company becomes clear as maximizing the surplus of an investment means that the company will maximize its profits. It also holds another promise: the decision to invest, made by a company that wants to maximize their surplus value, is likely to be based on rational thinking. In the case of investments made by a NOC this means that the relentless hunger for resources of the state is not dominant in the decision making process, it means that the investments made by the NOC are made under more or less the same
circumstances as is the case with Royal Dutch Shell or Exxon/Mobil.
The most important thing to do now is to identify the factors that would make a foreign investment in the interest of the NOC’s involved and not in the interest of the CCP. This can be done by looking at the investment climate of the countries that receive the investments made by Chinese NOC’s. For example, the risk of an investment is higher in Sudan compared to an investment in Canada. If it is the case that over time the NOC’s invest less and less in developing countries in Africa and Latin America and start investing more and more in Canada, the United States or the Middle East (better quality and easier accessible), then it could mean that corporate interest are becoming more important than national interest (Calabrese, 2005). It also means that state capitalism is less of a threat than Brenner assumes it is, as even though the NOC’s are owned by the state, it does not completely controls the NOC’s. The NOC’s are more ore less
independent actors that make decisions, which are good for the company and not necessarily for the state.
A second factor is the kind of investments these NOC’s make. Are they just cooperating with foreign companies or is it an acquisition? If an NOC is just simply buying up all the companies that it can to acquire new oil and/or gas reserves than it means that the strategic interest of the state are prevailing over the interest of the company and that the goal of the NOC is probably not to maximize its surplus (Downs, 2011a). However, when a NOC is investing in partnerships with other large international petro companies to help develop oil fields in Iraq, it becomes less clear which interest are prevailing. In this case it is more likely that it concerns a combination of state and corporate interest. But when Chinese NOC’s start investing in oil sands projects in North America, which are mainly operated for the North American energy market, it seams that NOC’s see this as a good investment and are not controlled by the interest of the CCP. The final factor that should be taken into account is the size of the
company involved. As pervious research has shown the size of the company does matter in how independent it is from state control (Downs, 2007: 49). As the profits rise and the firm becomes more active on the international market they start to rely more on their ‘their globalizing senior management, and ....
ministerial superiors back in China’ (Breslin, 2013: 1282). It should also be noted that competition between SOE’s is not uncommon and that they operate with more than one state actor. As a consequence when the commercial interest of two competing SOE’s collide with each other this often results in them pursuing market driven relations with foreign governments and firms that can be opposite to the political and foreign policy interest of the CCP (Liou, 2009).
2.3 Summary
The theoretical framework that is used in this paper builds on two concepts that are on two very different sides of the ideological spectrum. The first, state capitalism emphasizes the role of the state in the economies of authoritarian states that are trying to develop their economy. You don not have to read articles from journals to observe this fact, you can read it everyday in your newspaper and see it on the news. Regarding to China this is not any different. This of course has to do with the communist history of the state but also with economic reforms that have been implemented since the 1980s. These reforms were always
intended to find a balance between the benefits of a free market economy and the benefits of state control over the economy (Bremmer, 2009). This means that when it comes to foreign investments the state should play an important role in the decision making process. Therefore these investments should follow, for a large part, the strategic interest of the state and the economic interest of the firm are less important.
The second part of the theoretical framework focuses on the power of a free market system and only takes economic interest in to account. In this case the role of the state is less important. Therefore the economic interest of the companies involved should prevail over the strategic interest of the state. What could be expected is that in this case companies go for saver investment
environments and not only invest in states were the long-‐term future is not clear and the state itself is very unstable. As an example: Chinese NOC’s invest less and less in South-‐Sudan and start to invest more in Canadian oil sands.
What should be noted is that although the two concepts belong to
research question should be either state capitalism or surplus maximization. It could be that in China the CCP provides the car (capital, but also diplomatic support) and the NOC’s are behind the wheel (they make the investment decisions). In this case the CCP and the NOC’s work together to achieve both their goals: securing the economic growth rates of the Chinese economy (strategic interest of the CCP) and the future profits of the NOC involved.
3.0 Research Method
The sources that will be used for this research are mostly qualitative. They will consist of annual reports of CNOOC limited, CNPC/PetroChina and Sinopec. As the CNPC, the CNOOC and the Sinopec Group are not listed and are completely state-‐owned these NOC’s do not provide the public with annual reports and the news articles they present on their website include very little financial
information and these are often focused on domestic affairs. This means that the remainder of this research will focus on the subsidiaries of the CNPC, CNOOC and the Sinopec Group. Which are respectively PetroChina, CNOOC limited and
Sinopec (the inner workings of the companies will be explained in chapter 4.0). In addition to the annual reports the news articles that CNOOC limited,
PetroChina and Sinopec publish on their website will be used as these do provide enough financial information and many of these articles do concern with the foreign investments made by the companies.
With the investments made by Chinese NOC’s there are always other companies involved, may it be a utility company or a Chinese investment bank. It turns out that most investments made by Chinese NOC’s are backed by other investments made by state-‐owned investment banks (Downs, 2011). The investments made by these banks mostly include energy-‐backed loans (EBL’s). The most important provider of these EBL’s is the Chinese Development Bank (CDB). The CDB provides roughly the same information as the NOC’s concerning its business performance, annual reports, public statements and news articles, on its website. These sources will be added to the ones provided by the NOC’s. As the CCP plays an important role in this research the MFA is also an important actor for this thesis. By looking at the activities and statements of the MFA around the time of the investments it is possible to find out what kind of support by the state is provided during the times that investment deals are made. The website of the MFA reports every foreign activity made by any ministry. It does this even better than for example the Ministry of Defense. More often than not the MFA reports that the Chinese Minister of Defense has a meeting with is Saudi counterpart and the Ministry of Defense does not mention anything at all. This means that for the purpose of this research the statements made by the
MFA will be the main source for the role of the CCP in China’s foreign investment strategy.
The problem with these sources provided by Chinese SOE’s and ministries is that it is not entirely clear if these can be trusted and provide all the
information that is available regarding the terms that have been agreed upon with every acquisition, investment, merger or take-‐over. To overcome this information gap this thesis will also make use of articles that have been
published by the New York Times and the Wall Street Journal. These articles put the investments into a broader perspective and link these investments to other investments made by Chinese government and other Chinese SOE’s in the same region and roughly around the same time. This will help showing the state capitalism side of the research, because it shows that the CCP is pushing investments around a certain oil or gas field to secure the supply of energy towards the Chinese economy.
In addition to the articles of the New York Times and the Wall Street Journal this thesis will also make use of reports that are published by the International Energy Agency (IEA), the World Energy Council (WEC) and the American Energy Information Agency (EIA). The reports that are provided by these institutions help explaining the long-‐term trends in Chinese energy
investments or, in the case of this thesis, the investments made by Chinese actors in the petro sector. In addition, these reports provide also vital insights into the connection between the NOC’s and the CCP.
This thesis is mostly build on the foreign investments made by Chinese NOC’s. It was therefore important to make an overview of the most important investments made by the NOC’s up until 2014. A list of these investments is provided in chapter 5.0. This lists starts with the first foreign investments made by the NOC’s in 2002 and the most recent one is of April 2014. Due to the
development of the Chinese petro sector since the 1950s and the structural limits the NOC’s had to deal with up until the reforms of the late 1990s foreign investments made by the NOC’s were not possible until 2002 (for further explanation see chapter 4.0).
The list of foreign investments that is made for this thesis provides the opportunity to detect certain trends and also provides insights regarding the
power struggle between the CCP and the NOC’s. Again the question ‘who’s behind the wheel?’ is very important. Is it as Bremmer says the state all the way, or is Downs argument more tempting by stating that the state is in the backseat and therefore is not in total control of the investments made by the NOC’s
4.0 The evolution of the Chinese Petro Sector: ‘Going Out’
The Chinese petro sector has experienced some major institutional changes over the last fife decades. In December 1950 the State Council promulgated the
‘Regulation on the Mining Industry in the People’s Republic of China’, which stated that all domestic natural resources were property of the state and would be managed by the central government. With the discovery of the first oil field in 1955 the Ministry of Petroleum Industry (MPI) was established as the administrative body of the petro industry (Zhang ,2004: 71). Oil was perceived as a vital strategic resource for economic and
national security.
With the Soviet withdrawal in the early 1960s, the CCP experienced an imminent threat towards its energy security as the supply of Russian oil was cut of. In a response more resources were allocated for the
development of new oil fields and increased production. By 1970 China became a net exporter of oil and for a short while was the fourth largest producer of oil outside the Middle East (Houser, 2008: 144).
The MPI acted as the headquarters of the Chinese petro sector and made strategic decisions about the exploration of new fields and the production of oil. It also determined the price of oil, and controlled the production process, the refinery process, and the distribution process (Zhang, 2004: 75).
However, as the set price of oil was lower than the international market price, the MPI did not have access to foreign technology because it was too expansive. This changed in 1981 when the CCP allowed the MPI to sell oil that was produced after the set targets were met at market prices (Zhang, 2004: 78; Houser, 2008: 149). The income that was created by selling this ‘extra’ oil could only be used to acquire advanced foreign technology and equipment, and for importing pipelines and other steel products exclusively for the petro sector. This created a major incentive
for the MPI to produce more oil and spurred technological advances in the Chinese petro sector.
In 1988 the CCP decided that the MPI should be abolished and was restructured into the Chinese National Petroleum Company (Zhang, 2004: 81). Although the CNPC was set up to act more like an enterprise than the MPI, it still had to undertake most of the functions that were the responsibility of the MPI, which included setting of production targets, quality standards and
environmental policies. At the same time the CCP started to experiment with corporate structures in the petroleum sector to make it competitive on the international market.
Even though these reforms put more emphasis on the business side of the different NOC’s, it was not until 1998 that the headquarters of the CNPC and Sinopec were responsible for both government and business functions (Houser, 2008: 155). This means that these NOC’s were basically ministries determining production quotas and production standards. However, the government was still in control when it came to determine oil prices, investments, and the profits that these NOC’s made went straight to the state’s treasury and only a small
percentage of those profits could be used for research and development of new oil fields and new production techniques. The position of the headquarters of the CNPC and Sinopec was therefore very weak (Zhang, 2004: 88).
The reform process that the CCP started in the oil sector during the 1990s had two objectives: centralize the power over the companies in their respective headquarters and modernize the corporate structures in such a way that the NOC’s could compete on the international market (Nolan, 2002: 125). During this period the oil sector made major technological advances, incorporated modern management techniques, raised substantial capital on the international market through so called Hong Kong Shares flotation and carried out a huge internal restructuring of the CNPC, CNOOC and Sinopec to prepare them for a limited stock market launch. This stock market launches were limited because the shareholders of these NOC’s are either the Chinese state or a Chinese national bank (see annual reports from both Sinopec and the CNPC).
The 1998 reforms implemented new corporate structures in the Chinese oil sector. The problem remained that as the NOC’s emerged from this reform
