Hong Kong Investors Now Have a Comrade Shareholder: the Communist Party

 | Sep 12, 2017 | 9:00 AM EDT
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Investors trading Hong Kong stocks may find they have a new business partner: the Chinese Communist party.

The central government has orchestrated the rewriting of the articles of incorporation of more than 30 Hong Kong-listed companies to put the Communist Party at their core. The goal is to ensure that the party has ultimate sway over any corporate decisions. 

The timing is odd, since China has generally been moving toward relaxing investment rules in various sectors, as well as making it easier for foreign investors to access domestic stocks listed in Shanghai and Shenzhen. But the changes are occurring at some of China's biggest companies - the oil giant Sinopec (SNP) , for instance, and at ICBC (IDCBY) , which is currently the world's largest bank by assets.

Somewhat bizarrely, large fund managers including Fidelity and BlackRock (BLK)  chose to back those motions. It's something you'd find it hard to imagine those investors doing if Washington tried to write the Republicans or Democrats in as the ultimate power controlling General Electric (GE) , Bank of America (BAC) and Exxon Mobil (XOM) . One fund manager likened the participation of foreign fund managers to "turkeys voting for Christmas."

The Hong Kong listings are already state-owned companies, so investors should already be aware that they're a shareholder alongside the Chinese government. But now it seems any form of shareholder vote or say can simply be overridden by the Communist Party, rather than the Chinese state.

China Railway Group (CRWOY) , which despite the name, is one of China's largest construction companies. It makes the power particularly clear.

Its rules 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," as this article in the Financial Times explains.

It remains to be seen what Hong Kong regulators make of the issue. They are hard at work examining whether this amounts to market interference under Hong Kong's listing rules.

Chongqing Iron & Steel HK:1053 has adapted its articles of incorporation to force itself to set up a committee within the company that is monitoring operations for the Communist Party of China. It must also have a discipline inspection committee "to carry out activities of the party."

The Chongqing company has also written in a rule stipulating that the "ideological and political work" of the party be felt throughout the "spiritual civilization construction" of the company. Many of the companies are required to foster the development of mass organizations such as the Communist Youth League.

Other articles say the Communist Party should be "providing direction" and "managing the overall situation" at a company. 

As with most things in China, the figures are supersized. The companies, combined, have a market capitalization of more than $1 trillion. 

To the ordinary people, China is selling the changes as part of a push to force efficiency upon the bloated state sector. Under communism, state-owned enterprises have been designed to provide jobs and stimulate local economic growth, rather than make profit their focus.

You would think market forces would be the fix for the efficiency problems. But the Communist Party clearly sees otherwise.

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