Bragging Rights Grow for Chinese Stocks PetroChina’s Value to Surpass Exxon’s

By Donald Greenlees and David Lague

When the state oil and gas firm PetroChina makes its debut Monday on the Shanghai Stock Exchange, China’s booming stock markets will be on the verge of another milestone in market valuations. Soon after the Shanghai listing, analysts expect PetroChina to surpass the U.S. energy giant, Exxon Mobil, as the world’s largest company by market capitalization.

PetroChina shares, already traded in New York and Hong Kong, are expected to be seized on by a market awash with cash and investors eager for new opportunities. At the close of markets Friday, PetroChina was valued at $460 billion, making it the world’s second most valuable company, worth about $26 billion less than Exxon Mobil.

The ebullience with which Chinese investors have dived into the markets of Shanghai and Shenzhen, unleashing the huge savings in personal bank accounts, has made China home to the world’s most expensive companies. China has the biggest bank, insurance company, telecommunications carrier and airline by market capitalization.

By that measure, it has 5 of the world’s 10 largest companies.

The prices set on the Chinese exchanges, still largely isolated from the rest of the world by regulatory barriers that limit the amount of foreign money going into the stock markets and domestic money permitted to go out, bear little relation to company performance or to markets elsewhere.

Despite the prospect of PetroChina’s share price doubling on its debut in Shanghai and overtaking Exxon Mobil in value, it is about half as profitable as its rival. In the first half of 2007, PetroChina’s net income was $10.9 billion, compared with $19.5 billion for Exxon Mobil.

With China’s economy continuing to grow at double-digit rates and no sign that investors are losing their appetite for the share markets, the price bubble has so far been unaffected by issues that have shaken other markets, like mortgage defaults by low-credit- rated borrowers in the United States.

“It could continue for a while longer yet,” said Warren Blight, a market analyst with Fox-Pitt, Kelton in Hong Kong. “Everyone agrees that at some point the stock market bubble will burst. The issue is when that will happen and what will cause it.”

While times are good, PetroChina and a string of other state- controlled companies are cashing in on the euphoria with so-called A- share mainland listings. The oil and gas company raised 66.8 billion yuan, or $8.9 billion, before its listing Monday by selling four billion shares at 16.70 yuan a share, the largest amount ever raised in a mainland initial offering.

But only 13 percent of the company has been floated. The rest is in the hands of its state-owned parent, China National Petroleum.

Analysts forecast that the shares will trade from 30 yuan to 50 yuan, or $4 to $6.70, on its first day, enough for PetroChina to achieve the largest market capitalization in the world.

That compares with the Friday closing price of its Hong Kong- listed H share of 19.60 Hong Kong dollars, or $2.53. Mainland shares typically trade at a big discount in Hong Kong compared with their mainland prices.

Weighed down by government-imposed price caps on gasoline, PetroChina’s refinery business is losing tens of millions of dollars a day, according to petroleum analysts.

“They are not of the strength of Exxon Mobil,” said John Vautrain, senior vice president of the energy economics consultancy Purvin & Gertz in Singapore. “They are very strong in China, and that is good if you make money, but China is not a good place to be a refiner at the moment. They are deeply under water, losing a lot of money in refining.”

The fine details of balance sheets and comparative values of shares elsewhere in the world have done nothing to dampen the high spirits of Chinese investors.

After decades where low-interest-rate-bearing accounts in state- owned banks were virtually the only outlet for savings, the soaring stock market has become irresistible to a new generation of Chinese.

“There is an accumulated desire to invest,” said Li Hongtao, a futures analyst in Beijing with Zhejiang Yongan Futures, and an active investor. “People are heavily influenced by their families, friends and colleagues at work. A lot of them don’t have any knowledge of the market or any idea of the risk.”

Earlier this year, state media reported that the number of share trading accounts had exceeded 100 million. For millions of retirees, students, teachers, public servants and office workers, logging on to the Internet and experiencing the instant gratification of rising portfolio values has become part of their daily routine.

In offices all over China, market movements influence the workplace atmosphere, according to surveys and reports in the state- owned media. In some workplaces, monitoring the market and trading stocks have become a threat to productivity.

In Wenzhou, one of China’s wealthiest cities, the city government earlier this year banned public officials from conducting transactions at work or leaving the office to trade stocks, the state-run Legal Daily reported. Officials caught neglecting their duties would be punished, the report said.

As China’s economic boom continues to lift living standards, the stock market is contributing to a widespread sense of well-being for many investors. This is fed by blanket coverage in the media with newspapers, magazines and business Web sites carrying prominent stories about stock market winners.

To some analysts, mainland Chinese investors have embraced stocks with as much enthusiasm as their market-savvy compatriots in Hong Kong.

“It is now the major topic at any dinner table,” said Li, the Beijing-based investor. “China’s economic growth has been incredible over the past 10 years, and the stock market is a measure of that.”

Investors rattle off the names and stock code numbers of hot market performers in the same way sports fans know their favorite players.

“Wangfujing Department Store Company, 600859,” said Li’s office colleague Zhang Guangming, when asked about the best-performing stock in his portfolio. “I buy for long-term value, and this stock has gone from 5 yuan to 50 yuan in 10 years.”

The big unknowns are when this free-market revelry in Communist China will come unstuck and the consequences of such a crash.

Some economists say that a major retreat would have a limited impact on the health of China’s overall economy.

Others warn that a sharp decline that hurts business and investors could be the catalyst for a financial crisis, with a fresh wave of bad loans undermining the balance sheets of China’s fragile, state-controlled banks.

In a report on the Chinese economy earlier this year, the World Bank said that China’s banks appeared to have limited exposure to the stock market, although the report acknowledged there was insufficient data to make an accurate assessment.

Blight, the Hong Kong analyst, who specializes in analyzing Asian banks, said China’s banks had benefited from a “perfect storm of good news” arising from strong loan growth, widening profit margins on loans, room to increase fee income, a tight control on expenses and lower provisions for bad loans.

That has helped drive up the share price of the banks. The Industrial and Commercial Bank of China has become the biggest bank in the world by market capitalization, although it is less profitable than global competitors like Citigroup and HSBC.

Blight said there would be pain for the banks in a stock market crash, in part because “people borrow for working capital” and then bet it on the share market.

“If the market does collapse, there will be a lot of pain, and the banks will end up being exposed in some way,” he said. “It won’t be disastrous but it will hurt them.”

In a clear indication that the authorities worry about the social and political consequences of millions of first-time investors suffering heavy losses, senior Chinese officials have issued periodic pleas for investors to show caution.

Shang Fulin, chairman of the China Securities Regulatory Commission, warned twice last month that investors needed to be aware of the risks as the market continued to climb.

There are concerns the impact of a collapse could reach well beyond mainland China.

Joseph Yam, head of the Hong Kong Monetary Authority, which maintains the city’s currency peg with the U.S. dollar and invests its foreign reserves, warned that the fallout from a bursting of the bubble could hit markets outside China.

“The inevitable market adjustment, if sharp and destabilizing, would have serious implications for monetary and financial stability, not just for the mainland but also for others, including of course Hong Kong,” he wrote in a commentary posted on the monetary authority’s Web site Oct. 25.

These warnings have seemingly had minimal impact with many investors convinced that the government will not allow a crash, particularly before the Beijing Olympics in August.

Gordon Kwan, an analyst at CLSA Asia Pacific Markets, said the Chinese government had the tools to exercise considerable influence over the performance of the share markets. Kwan, who analyzes oil stocks, cited a decision by the government last week to increase prices at the pump, just ahead of PetroChina’s Shanghai listing.

“It might be why the government timed the price hike, so PetroChina could squeeze past Exxon Mobil,” he said. “I think China wants to win all the gold medals. Face is very important for China.”

Originally published by The New York Times Media Group.

(c) 2007 International Herald Tribune. Provided by ProQuest Information and Learning. All rights Reserved.