Chairman Wang

The shock arrest of Chinese state-controlled Sinopec’s second-in-command, Wang Tianpu, yesterday, did little to dampen the rally in Chinese stocks or, indeed, shares in Sinopec itself. China’s feared Central Commission for Discipline Inspection (CCDI), the body that enforces communist party discipline, yesterday placed Wang under investigation for “alleged serious violations of law”.

But Sinopec shares in Hong Kong are higher today than they were at the end of last week, before the arrest of its chairman. China’s Shanghai Composite index roared into overdrive in November last year and shows few signs of slowing down, despite recent regulatory attempts to cool the market. It has risen by around one third this year and the Hang Seng in Hong Kong is not far behind.

One argument is that retail and institutional investors need somewhere to invest, following the collapse in real estate values — one of the country’s largest developers, Kaisa, missed payments to international bondholders earlier this month. There is still a lot of cash sloshing around the mainland markets looking for an outlet, and many investors keep faith in oil. Chinese GDP growth may be slowing but oil demand matched it in the first quarter, both metrics rising by 7pc year on year.

Another theory posits the counterintuitive notions that slower growth and the crackdown on corruption are good for investors — both indicate progress towards the “rebalancing” of China’s economy required for sustainable growth. Rent-seeking officials have been among the main beneficiaries of China’s investment binge, this theory goes. Rebalancing will necessarily involve breaking the power of, and probably impoverishing, China’s legion of corrupt party officials. For the oil sector, “mixed ownership reform” envisages giving private-sector companies greater access to state-dominated markets — a project intended to cross-pollinate state power and private-sector efficiency with enhanced shareholder oversight.

Kaisa’s woes followed an investigation into corruption. Its assets were frozen amid allegations surrounding its links to Jiang Zunyu. Jiang, who amassed a property empire in the course of his work as an official with the Shenzhen branch of the Political and Legal Commission, was arrested by the CCDI last year. The Political and Legal Commission was headed by Zhou Yongkang — an even higher ranking official than Wang Tianpu, who used to sit on the Politburo. Zhou appeared in court in Tianjin earlier this month charged with corruption and buying influence. A former head of state-owned CNPC, Zhou supposedly headed the “oil faction” of officials to which Wang — although he worked for rival Sinopec — is alleged to belong.

“The more confident President Xi [Jinping] is about his political position, and his ability to overcome vested interests to impose reform, the more likely Beijing is to recognise publicly that GDP growth will slow dramatically as China rebalances,” says Michael Pettis, a Beijing-based economist. “Conversely, the more aggressively Beijing proposes high growth, the more likely that the administration is not confident about its ability to control the political process.”

Whether the arrests will lead to reform is anyone’s guess. So far, the auguries are not promising. CNPC pledged to refocus on its historic strengths of domestic oil and gas production in the wake of the arrest of Zhou and its own chairman, Jiang Jiemin. But it will shortly open a new refinery at Anning in southwest China while crude production is unchanged from a year earlier. The company, which was supposed to invite private-sector investors into its upstream acreage, has dragged its feet. It is rethinking plans to lease capacity on its LNG terminals to private-sector firms.

Sinopec, so far, has demonstrated rather more commitment to change. It raised 107bn yuan ($17.2bn) last year from the sale of 10pc of its marketing and storage business to private-sector investors. Reform is the legacy project of the company’s highly regarded replacement chairman Fu Chengyu. But even here it is hard to see reform improving. Minority investors still have little say over how the company is run. One persistent rumour doing the rounds suggests that state-backed pension funds and banks are routinely ordered to buy shares in companies whose officials are under investigation, to forestall a rout. And the rumour that refuses to die — despite straight denials — of a merger of CNPC and Sinopec proposes merging two giant companies with a reputation for corruption and inefficiency into an even larger and less accountable behemoth.

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