Money Matters

Regulators’ silence on Communist Party presence in listed state companies is deafening

Hong Kong regulators are doing little to curb the growing influence of Communist Party-affiliated bodies within H-shares and red chips

PUBLISHED : Friday, 22 July, 2016, 5:07pm
UPDATED : Friday, 22 July, 2016, 10:45pm

Regulators’ silence on communist presence in listco deafening

The listing of state firms overseas has always been a game of pretend.

Their profitability is a result of negotiation with the Ministry of Finance. Their share options are either never exercised or go into the government’s pocket. Their independent directors have no say on the reshuffle or pay of senior officers.

Now, Beijing is taking off the remaining masque by demanding its state firms put the Communist Party organisation into their articles of association.

The damage to Hong Kong is obvious. Our regulators have, however, put up no resistance.

State corporates have had party committees ever since the birth of New China; but it has never been “real” for those companies listing in Hong Kong.

Eager to please foreign investors, Beijing has allowed most H-share companies and red chips to go without a party body while their holding companies retain them.

Over the decades, the remaining party bodies were reduced to a symbolic role, controlling mainly personnel matters without its own staffing.

Beijing is ... demanding its state firmsput the Communist Party organisation into their articles of association

Now, President Xi Jinping is seeking to resurrect corporate party bodies to police against corruption and to control state firms. The details are worrisome.

A party organisation is given de facto veto power on key decisions, its own staff, and branches that cover each and every profit centre of a corporate.

The board has to consult the party body on important policy changes, key appointments, project investments and the allocation of large funds. One example is China Resources Group, which consulted its party body before voting against China Vanke’s restructuring.

Key appointments also include those to the remuneration, audit as well as strategic committees under the board. The party body can also recommend its own candidates.

What director would vote against a party body’s “advice”? This is a new centre of power with muscles that will reduce the board to a rubber-stamping body.

Extending influence in this manner inside a company is bad enough. But putting it into the articles of a company listed in Hong Kong is even worse. Three specialists went into detail with Money Matters about the problem.

“Can regulators in Hong Kong hold them [party bodies] responsible for problems on a listed company? Or are they beyond the reach of regulators altogether?” said an ex-officer of the Securities and Futures Commission.

Still, the party committee is appointed by the Communist Party which is not the government and therefore not a shareholder. The board has no control over the party body. So how can Hong Kong’s rules and laws that govern the board and shareholders regulate the party body?

Secondly, model articles in the Company Ordinance make clear that the governance of companies incorporated in Hong Kong is based on shareholders and directors.

If a Hong Kong incorporated red-chip changes its articles to give a governance role to a party committee, this would conflict with the very specific provisions, the long-established principles as well as practises of the governance of Hong Kong companies.

A senior bank official pointed to the operational hurdles. “Being state-owned and manipulated by the party is very different from having a party body in the articles,” she said.

“The latter will trigger a client due diligence review. The challenge is a new decision maker has been added and we don’t quite know where to put it in our political risk assessment,” she said.

Foreign regulators would be having the same query. In the 1992 negotiation of state company listings, these implications caused Hong Kong regulators to stand up and say no to Beijing when the matters of party organisation was brought up.

Now, our regulators are timid.

Sinopharma Group, an H-share company, has been allowed to alter its articles to “establish a party organisation to carry out communist party activities, and provide necessary conditions to facilitate such activities”.

Questions have be asked. Who appointed the party organisation? Who provides the funding and staffing? What role does it play? What is the relationship with the board?

More examples will follow. Among them is Citic Group which is listed and incorporated in Hong Kong. It has pledged to amend its articles to include a party organisation in its April report to the party’s graft fighter.

Fighting the lone battle are some independent directors from Hong Kong. “We have managed to block one but it won’t be for long,” said one of them.