All five Hong Kong-listed units of China Resources Holdings Co. Ltd. faced heavy selling Tuesday after Beijing announced last week that it is investigating Song Lin, its former chairman, for “serious disciplinary violations”.
The announcement again highlighted the risks of investing in state-owned enterprises (SOEs). The Hong Kong Economic Journal’s EJ Tactics column examines what makes SOEs breeding grounds for corruption.
To begin with, SOEs have a corporate structure that breeds conflict of interest. A reshuffle of senior cadres often leads to regulators being appointed to run companies they used to supervise, or vice versa.
This is amply illustrated by the case of Jiang Jiemen, the former chairman of state-owned oil giant PetroChina Co. Ltd. (00857.HK) who became the chief state asset regulator. Last year, he was abruptly removed and placed under investigation for alleged corruption.
Since March, 25 provincial officials have been sacked for graft, including two central committee members, according to the Central Discipline Inspection Commission. They were mainly in energy, telecommunications and other monopolies.
An ongoing reform of these state behemoths should focus on eliminating all forms of administrative monopoly, leaving regulatory functions to the government.
It is easier said than done, but if the problem is removed, profits pocketed by corrupt managers will start to flow to these SOEs.
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