Winnipeg Free Press - PRINT EDITION

Who, what exactly is CNOOC?

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Chinese law does not allow United States-based accounting firms to obtain documents they need to audit nine Chinese companies whose shares are traded on U.S. stock markets. Suspicion of fraud has deeply depressed the market value of U.S.-traded Chinese companies. Despite demands of the Securities and Exchange Commission, those suspicions will remain because the auditors are simply forbidden to look over the Chinese wall.

U.S. investors in those companies might like to have known years ago, when they bought into those companies, about the Chinese audit restrictions that may now be concealing fraud. They might have done better to move by small, cautious steps and discover the peculiarities of the Chinese rules before the stakes got too large.

The Harper government, which is about to reach a conclusion on the Chinese takeover of Calgary-based Nexen Energy, should look for ways to expand trade and investment links between China and Canada. It should develop those links step by step, recognizing the limits of Canadian knowledge about China and about the nasty surprises that occasionally arise.

Canadian investors in Sino-Forest Corp., a former market darling now bankrupt, were baffled by the same fog of misinformation that the U.S. Securities and Exchange Commission is wrestling with now. Sino-Forest investors relied on the accounting firm Ernst & Young to find out if Sino-Forest really did own the woodlands and cutting rights it claimed. This turned out to be a Chinese state secret that, for reasons of high policy, could not be disclosed to foreigners. Ernst & Young, without admitting fault, has agreed to a settlement with the investors. The Ontario Securities Commission this week accused Ernst & Young of failing to conduct its audits according to industry standards.

The U.S. securities regulator, in the same way, this week accused the Chinese affiliates of the greatest U.S. accounting firms of withholding documents from investigators. The firms contend they are forbidden to give documents to foreigners. As things stand, U.S. investors have no way of knowing, and no prospect of soon discovering, whether Chinese companies offering their shares in the U.S. market really have the assets and the revenues they claim.

Canadians should be glad the Chinese National Offshore Oil Corp. wants to take over Nexen and its oilsands operations. The Calgary-based firm has had trouble meeting its own production targets and needs either an infusion of capital or a management shakeup. The CNOOC takeover might be a way of achieving both.

But who exactly is CNOOC and why is it suddenly knocking on Canada's door? If the company had operated in Canada previously, Canadians might be less surprised and less apprehensive about the Nexen takeover. What kind of neighbour is CNOOC? What is its relationship with the Chinese Communist Party, and what role will it play in giving effect to the economic policy of the party and its newly installed ruling group? What information about CNOOC's worldwide activities will be available to Canadian regulators and the Canadian public? What opportunity will Canadian regulators have to investigate CNOOC and verify the published information is correct? In light of the Sino-Forest debacle and the U.S. audit obstacles, these are not idle questions.

Prime Minister Stephen Harper should open Canada to a CNOOC takeover in step with CNOOC's openness to Canadian inspection of its affairs. Canadian oil industry regulators need as much information about CNOOC as they have about Chevron, Shell or any other multi-national firm operating in this country. If we are going to be told Chinese law forbids provision of documents to substantiate answers to regulators' questions, we should find that out now and not wait until the going gets tough.

CNOOC is a state-owned firm that claims to operate according to commercial principles and not according to the political demands of the Communist Party. Close study of its activities and full disclosure of its affairs may show how far that is true.

Editorials are the consensus view of the Winnipeg Free Press’ editorial board, comprising Catherine Mitchell, David O’Brien, Shannon Sampert, and Paul Samyn.

Republished from the Winnipeg Free Press print edition December 6, 2012 A16

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