Audit uncovers shortcomings in management of SOEs

Poor oversight on investments on top of improper feasibility studies contributed to billions of yuan in losses among state-owned firms

PUBLISHED : Saturday, 21 June, 2014, 12:53am
UPDATED : Monday, 23 June, 2014, 9:20pm


A government audit of the 2012 books of 11 large state-owned firms has found major irregularities and shortcomings in oversight procedures that led to billions of yuan in losses.

The revelations highlighted lax corporate governance among state firms and the need to tighten supervision and come at a time when Beijing leaders face a tough task in overhauling the inefficient state-owned sector. "Some did not carry out sufficient feasibility assessments or have flouted approval procedures when investing; some were lax on financial management," the National Audit Office said.

Poor oversight on investments was one of the biggest problems highlighted in the audit reports. The audit covers 50 per cent of the audited firms' assets.

Construction giant China Metallurgical Group, the parent of listed Metallurgical Corp of China, had formed a metals processing joint venture with a private firm without appraising the latter's assets as required. It booked 7.2 billion yuan (HK$9 billion) of losses in 2012 when the venture was handed over to another state firm, the audit office said.

The firm also booked losses totalling 3.1 billion yuan in three overseas mining projects with firms in Australia, United States and Pakistan.

The investments, made between 2003 and 2008, were done without conducting feasibility studies, and failed to obtain approvals from its board of directors and regulator the National Development and Reform Commission, the audit office said.

China Datang Group, parent of listed Datang International Power Generation, had invested in seven coal-to-chemical non-core business projects involving 30.4 billion yuan without seeking the permission of the State-owned Assets Supervision and Administration Commission.

Between 2005 and last year, nine units of monopoly China National Tobacco Corp were found to have invested 6.1 billion yuan in projects without proper head office approval.

Poor financial management was also identified as a major issue.

The audit office said China National Petroleum Corp (CNPC), parent of listed PetroChina, had placed 352 million yuan with PetroChina in the form of entrusted loans to earn interest. The funds were supposed to be the state's capital invested in CNPC.

CNPC's Kunlun Bank also faced a near total loss on 570 million yuan lent to private enterprise Xinjiang Tiansheng Industrial, due to lax credit checking and post-lending monitoring.

The audit office said the 11 firms have rectified the irregularities by adding or amending 1,194 internal rules, taking action against 190 staff, paid taxes of 178 million yuan and mitigated losses of 3.3 billion yuan. It did not say if anyone was punished, either internally or via the legal system.

Christfund Securities research director Simon Lam Ka-hang said reforming state firms is slow since it involves changing an entrenched corporate culture.

Implementing the Securities and Futures Commission's rules imposed in 2011 to enhance corporate governance standards has helped those mainland companies listed in Hong Kong.