China economy

Goldman Sachs at centre of latest bout of nationalism and resentment in China over Sinopec oil deal

  • American investment bank follows the likes of Dolce & Gabbana, Canada Goose and Lotte to suffer at the hands of negative online debate
  • Beijing government keen to attract overseas investment to offset effects of the trade war with the United States
PUBLISHED : Monday, 07 January, 2019, 8:32pm
UPDATED : Monday, 07 January, 2019, 8:31pm

China’s efforts to woo foreign businesses in an attempt to offset the trade war with the United States is battling against a rising tide of resentment, with American investment bank Goldman Sachs the latest to fall foul of a growing bout of nationalism.

Despite holding a tight grip over online debate as well as official media, the central government in Beijing is struggling to control outbursts of speculation against foreign firms at a time when China is keen to prove its free trade credentials.

And while it is hard to quantify the risks stemming from the such backlashes, they can be quite damaging when targeted at a particular firm, as recent examples involving the likes of luxury designer Dolce & Gabbana, Canadian down coat maker Canada Goose and South Korean retailer chain Lotte show.

The latest ill feeling towards an overseas firms stems from oil trading losses suffered by China’s state-owned oil enterprise Sinopec, with debate online asking whether Goldman should be blamed for the company’s bad investment decisions.

The rising chorus of complaints reflect popular suspicion and mistrust of foreign financial operations in China, just as the government is set to open up its financial services sector, analysts noted.

The scale of the losses suffered by Sinopec from oil transactions conducted by its trading subsidiary, Unipec, have not yet been disclosed, but Sinopec’s share price in Hong Kong and Shanghai plunged after it admitted to incurring “some losses during certain crude oil transactions due to the oil price drop”, it said in a statement released to the Hong Kong stock exchange on December 27.

The statement also confirmed Unipec president, Chen Bo, and the secretary of the Central Committee of the Communist Party of China of Unipec, Zhan Qi, had been suspended “due to work reasons.”

Brock Silvers, managing director of Kaiyuan Capital, said one problem facing western financial firms when they advise Chinese clients on increasingly sophisticated transactions is that corporate China often operates in legal grey zones.

Sinopec shares plunge after two trading unit executives suspended

“If Sinopec’s suspended executives broke existing law, they and their facilitators deserve sanction.” he said.

“But as China continues integrating its financial sector into global markets, foreign firms also need confidence that legal grey zones are unintentional, and that good faith efforts to legally navigate them won’t be retroactively condemned.”

Dolce & Gabbana suffered a backlash over a video campaign at the end of last year that was accused of being racist and subsequent comments allegedly from founder Stefano Gabbana labelled a “racist outburst” by the Chinese online community, while Canada Goose had to postpone the opening of a new store in Beijing following the arrest of Huawei chief financial officer Meng Wanzhou in Canada in December.

Lotte was forced to pull out of China altogether in May 2018 after a public boycott of its stores started in March 2017 after South Korea installed the US-made Terminal High Altitude Area Defence system, which Beijing said was unacceptable as it was capable of detecting China’s military secrets.

The timing and extent of these populist backlashes against foreign firms is completely unpredictable, making it more difficult for firms to take defensive steps.

While such protests are sometimes egged on by the Chinese government’s position in the official press as in the case with Lotte, other times the boycotts are at odds with Beijing ‘s stance, particularly now when it has stepped up its efforts to attract foreign business investment.

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In the case of Goldman, Chinese social media pointed the finger of blame for Sinopec’s losses firmly at the American investment bank which allegedly suggested a zero-cost hedging tool to buy call options and sell put options on crude oil futures contracts.

One WeChat account, named xqnews, published an article which was viewed more than 100,000 times, blaming Goldman for the losses.

The hedging tool essentially locked Sinopec into then-current oil prices, betting they would rise further, but when oil prices slumped, it was saddled with large losses because the scheme required it to pay more than the market price.

Speculation about Goldman’s involvement was so heavy that the firm was forced to issue a statement to the Beijing Youth Daily, the official newspaper of the Communist Youth League committee in Beijing, on December 31 denying that it had engaged in or proposed such trades, condemning the online accusations as “false and malicious.”

Analysts noted that blaming a foreign firm for causing the losses suffered by state-owned firms was both easy and convenient, increasing the risk that public hostility will undermine Beijing’s effort to welcome foreign investment to help support a slowing economy.

“I am a critic of Goldman. There are times where they are an easy target to point the finger at,” said Christopher Balding, an associate professor at the Fulbright University Vietnam.

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“I also think, however, it is indicative of the mood in China right now that, with no evidence, Goldman is rolled out as the villain due to the lack of better explanations.”

The online suspicion of Goldman contrasts with Beijing’s warm embrace of the institution, who have not only served as a major underwriter for initial public offerings by China’s biggest state-owned enterprises, but former executives such as ex-US treasury secretary Henry Paulson have often received the red-carpet treatment in Beijing and forged personal ties with China’s ruling elite.

And when Chinese President Xi Jinping invited foreign business executives to Beijing in June to highlight China’s goodwill towards foreign businesses, Goldman’s current chief executive David Solomon was among the guests.

At the same time, Chinese bookstores are openly selling titles such as Conspiracy of Goldman Sachs, a book by an influential Chinese financial journalist, and Sue Goldman Sachs, a book published in 2011 by Zhang Xiaodong, a former adviser to the State-owned Assets Supervision and Administration Commission – China’s watchdog of state-owned firms.

In his book, Zhang attributed losses at China Aviation Oil and other state-owned enterprises to “financial fraud” caused by foreign banks.

In 2004, China Aviation Oil Singapore, the overseas trading arm of the state-owned China Aviation Oil Holdings, China’s jet fuel import monopoly, suffered huge losses from oil trading.

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The company had built up large positions in futures and options trading, betting that oil prices would go down, with the likes of Goldman, Standard Bank London, Sumitomo Mitsui, and Societe Generale the trading counterparties in the deal.

China Aviation Oil was forced to book losses when oil prices kept rising in late 2004, triggering margin calls on the their highly leveraged positions, and their eventual losses totalled US$550 million, mainly owed to the foreign banks.

State media and Chinese scholars all looked into the matter, and questioned whether the Chinese company had been taken advantage of by a conspiracy of “foreign forces”.

“Trading of derivatives is very complicated, but the principal is straightforward. For each contract, you need to find a trading partner that is betting against you. That makes it easy to blame foreign banks coordination when they bet against one Chinese company,” said Nicolas Ni, a former oil commodities trader.

But Ni noted that it would take much more than just a few foreign bank branches to decide the price of a widely traded commodity like oil.

China’s nationalistic backlash against foreign companies can sometimes take on global investors, recently seen as US technology giant Apple recently downgraded its revenue forecast for the fiscal first quarter that ended on December 29 mainly because of weak sales in China.

Apple-related stocks pounded in China, Hong Kong after revenue outlook is cut

The unexpected downgrade caused its stock price to plunge and more broadly rattled investors in tech-related companies.

While some of its decline in Chinese sales came from weaker consumption due to a slowing economy and the US-China trade war, some is also blamed on resistance in response to the arrest of Meng in Vancouver on December 1 at the request of the United States.

Some Chinese firms have even offered incentives for their employees to replace iPhones with Huawei products.

Goldman confirmed there were no further updates when contacted by the South China Morning Post on Monday.