China’s Communist party is writing itself into the articles of association of many of the country’s biggest companies in a blow to investor hopes that Beijing would relax its grip on the market.
More than 30 Hong Kong-listed state-owned enterprises, representing more than $1tn in market capitalisation, have this year added lines to their central documents that place the party, rather than the Chinese state, at the heart of each group.
New phrases injected into the articles of association in recent months include describing the party as playing a core role in “an organised, institutionalised and concrete way” and “providing direction [and] managing the overall situation”.
The changes are being billed by the companies as part of Beijing’s efforts to improve efficiency and productivity at SOEs, which account for about a fifth of the country’s economic output. The revisions followed the annual meeting of China’s rubber-stamp parliament in March, although a handful of companies altered their articles last year.
While the new language makes explicit investors’ long-held assumption of party influence, the changes are the first time the party rather than the government has been named, investors said.
Companies acknowledging the role of the party range from state oil group Sinopec and ICBC, the world’s largest bank by assets, to steel and energy groups as well as leading brokers including Haitong Securities.
The articles of association for China Railway Group, one of the country’s biggest construction groups, now state that “when the board of directors decides on material issues, it shall first listen to the opinions of the party committee of the company”.
In the case of the country’s four largest banks, the changes were proposed by a unit of CIC, China’s sovereign wealth fund and the controlling party for government stakes in many companies.
“This is a reminder to investors they are buying into a party machine,” said David Webb, an independent investor and shareholder activist in Hong Kong. “This move to embed the party into constitutional documents of the companies puts a lie to the government’s claim they want market forces to play a greater role.”
Investors have voiced frustration with their inability to stop the changes.
“While it serves to formalise something investors were already aware of, this formalisation is not really the direction of travel investors wanted to see,” said David Smith, head of corporate governance at Aberdeen Asset Management Asia.
Amendments were passed by annual general meetings as special resolutions, which require a two-thirds majority. Beijing’s majority control of these companies lowered the bar for mustering remaining votes.
Several companies recorded zero opposition to the motions. But others, including China Construction Bank, would have failed to gather two-thirds support if the state had not been able to vote.
“Of course we voted against — it’s like turkeys voting for Christmas,” said one fund manager. “Sometimes the party and its plans can be in direct conflict with shareholders but what can we do? Its one step forward and one step back with China.”
China Railway Group said its amendments were to “integrate the reinforcement of leadership of the party with the improvement of corporate governance”.
The changes are causing consternation among Hong Kong regulators, but rules blocking large shareholders from voting need to involve a financial interest in the outcome. Other officials have called for more disclosure of the people running the party committees.
“Its time for the magician to come out and take a bow,” said one. “Caveat emptor was OK when we were talking a majority shareholder and its voting rights. That is no longer enough here.”
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