Closer Look: The COSCO Maelstrom, China’s shipping giant struggling in a swirl of conflicting interests

05.02.2013 19:44

Closer Look: The COSCO Maelstrom

COSCO Chairman Wei Jiafu can save the company from struggling in a swirl of conflicting interests by taking the company’s shares off of public exchanges

By Wang Lan

Shipping giant China COSCO Holdings Co. Ltd. announced March 28 that the Shanghai Stock Exchange (SSE) would tag the company’s shares for “special treatment.” The measure is used to warn investors of a company’s possible delisting after a company reports two straight years of losses.

In 2011, COSCO lost 10.4 billion yuan, and it posted annual losses of 9.56 billion yuan in 2012, marking the second straight year the company reported a loss.

COSCO is not the only state-owned enterprise (SOE) which has failed to get out of the red. COSCO Chairman Wei Jiafu stated in early April at the Boao Forum in Hainan, “If the company is performing as badly as a few people say, how would it be possible for me to attend the BRICS Summit with government officials in Durban?” Wei went on to add, “I am not worried if the central government and the State Council supports COSCO.” His words sparked public acrimony.It’s not surprising that COSCO reflects the wills of the State Council given the company’s status as a centrally-administered state-owned enterprise. However, COSCO is also publicly-listed and beholden to the interests of shareholders. COSCO must seek to resolve this conflict of interest by delisting from the market and going private.

Two meanings lie in the privatization of property, one is the privatization of the SOE, and the other is taking the listed company private. In this article I refer to the latter.

After a delisting, the only shareholder of COSCO would be the State-owned Assets Supervision and Administration Commission. Without restraints from outside investors, the government assets regulator can take swifter action in righting COSCO’s course.

The company would have no need to make information public following a delisting. Subsidies made by government to COSCO have come under criticism in the past by foreign investors for being related to China’s “paramilitary forces” or “shouldering a special mission.” If public disclosure were no longer required, the company would have more maneuverability in raising capital.

For a centrally-administered company such as COSCO, it was never a wise choice to go public. The state-owned company was doomed to be split on personnel appointments, business strategy, information disclosure and accounting. Sometimes the government’s national strategy does not align with the interests of investments.

COSCO was listed on the SSE in June 2007. Looking back at its performance over past six years, its combined net profit was just 9.1 billion yuan. Its shares closed at 3.53 yuan on April 19, down approximately 95 percent compared to an all-time high of 67.84 yuan.

Put simply, if the top executive of an SOE cares must carry out the will of policymakers, the interests of investors are not going to be the top priority. A man cannot do two things at once. Mr. Wei, please delist COSCO.