China's Insider Culture Stains CNOOC Foreign Bid

Agenda-Setting Financial Insight.
July 30 2012 5:31 PM

China's Insider Culture Stains CNOOC Foreign Bid

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Chinese companies call for fairer treatment from foreigners, but China’s critics say that these companies still don’t play by the accepted global rules of capital markets.

Photo by SABAH ARAR/AFP/Getty Images

Chinese companies call for fairer treatment from foreigners. China’s critics say that these companies still don’t play by the accepted global rules of capital markets. The accusation of insider trading around the $15 billion bid by Chinese oil major CNOOC for the Canadian producer Nexen supports the critics.

The U.S. Securities and Exchange Commission filed a complaint on Friday against a Hong Kong vehicle controlled by Zhang Zhirong, China’s 26th richest man as ranked by the country’s New Fortune Magazine. The American regulator said that a purchase of 14.3 million Nexen shares only four days before the CNOOC bid provided an unrealized gain of $7.2 million. Zhang’s ship-building empire has a longstanding strategic cooperation agreement with CNOOC. In response to the accusation, share prices of the shipbuilder, and a property company also controlled by him, fell by double digit percentages in Hong Kong.

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When capital markets are relatively unsophisticated, high-level insider trading hardly seems scandalous to those involved. French politicians and businessmen were genuinely surprised at the furore raised by their 1988 gains from buying cheap shares of a target of aluminium producer Pechiney. There was not even much indignation in Italy in 1995, when an executive at Italian glasses-maker Luxottica bought shares in an acquisition target.

Standards for propriety are higher now in Europe and in some Asian countries. In Japan, Nomura’s weak response to insider trading at the firm just cost the chief executive his job. But Chinese authorities will find it harder to reach such a high level of indignation.

In China, insider trading is just one manifestation of a widely accepted insider culture. The powerful, and their families, often use positions and connections for personal gain. The Chinese securities regulator is trying to crack down on insider trading, but a few prosecutions aren’t likely to change the culture.

The Chinese way doesn’t help companies like CNOOC. Although no one there has been accused of wrongdoing, the case casts doubt on its promises to bring lots of benefits to Canada if it is allowed to buy Nexen. A $7 million case may have damaged a $15 billion deal.

Read more at Reuters Breakingviews.

Wei Gu, CFA, is Greater China columnist for Reuters Breakingviews, based in Hong Kong.

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