Bourses taking stock in China
ZHAO RENFENG,China Business Weekly staff
As China's economy continues roaring ahead, foreign bourses are rushing into the Chinese market. They are searching for local companies hankering to list overseas.
Officials of some foreign bourses recently visited several economic forums in China to talk up their strengths and the benefits of listing on their markets.
The New York Stock Exchange and NASDAQ have each applied for a licence to open a representative office in the country, local media reported last month.
"NASDAQ and similar exchanges see significant opportunities for themselves, their member investment houses and institutional and individual investors to 'get in on the ground floor' in terms of Chinese companies," said Kevin O'Connell, chairman of US-based law firm O'Connell & Co.
Experts say both investors and exchanges see China as a great opportunity, in terms of future growth and wealth creation. With China's GDP (gross domestic product) growth still running at more than 8 per cent, and well in excess of the western world, it's no surprise China continues to attract large amounts of foreign investment.
A main reason foreign bourses are so interested in China, says Yasheng Huang, associate professor with US-based MIT Sloan School of Management, is there is huge demand for China-related assets from investors in the United States and Europe.
The easiest way for them to acquire these assets is by purchasing Chinese stocks issued on these bourses, Huang added.
Numerous quality companies have matured to the extent they have strong corporate governance procedures and solid management in place, and which, in the exchanges' minds, represent a strong "upside" to investors, O'Connell said.
"There continues to be a view in the West that China is 'exotic,' and that things associated with China 'sell well,"' he added. "In this day and age, I think investments in Chinese companies are viewed as having the strong possibility of 'selling well' on overseas exchanges."
James Berman, president of US-based JBGLOBAL.com, an investment advisory firm, said another factor the local currency's peg to the US dollar has attracted speculators to Chinese companies of late.
Berman said many foreign traders have been purchasing yuan-denominated assets, such as the equities and bonds of Chinese corporations, in the hopes Chinese assets will be rise when the yuan appreciates after its peg to the dollar is loosened.
"This is a short-term strategy that is fraught with danger for many investors, since they often don't know much about the finances of the assets they purchase," he said.
Since Warren Buffett's purchase of a stake in PetroChina, the country's largest oil company, was disclosed a few years ago, there has been much international interest in Chinese companies.
"When the Oracle of Omaha (Buffett, widely considered to be the world's second-wealthiest man) buys Chinese companies, people pay attention!" Berman said.
Berman's investment strategy focuses on multinational companies that can leverage their foreign exposure in China, because he believes "China represents the most-dramatic investment opportunity since the rise of the modern American economy after World War II."
China's equity market is still underdeveloped, which is another reason for Chinese companies to list overseas.
"China's stock market investments are highly speculative rather than long-term. China has one of the highest stock turnover ratios rapid buying and selling in the world," Huang said.
"This environment is extremely difficult for firms that are seeking quality and long-term growth capital. So they take their assets abroad."
Experts suggest the trend will continue as long as China's GDP growth continues at an above-average pace, and as long as policy decisions in China remain friendly to shareholders' rights and investment.
While NASDAQ has been aggressively trying to change its image, as a bourse solely for tech companies, in China, in the hopes of attracting all kinds of companies, NASDAQ-listed companies are more typically newer, perhaps more technologically oriented, and perhaps still viewed as representing a more aggressive investment with a higher level of risk, Berman said.
Generally, the New York Stock Exchange (NYSE) has tougher listing requirements.
The NASDAQ, therefore, is more appropriate for newer, more speculative companies, while NYSE is better for more established companies, he added.
Some Chinese mainland and Hong Kong companies list as ADR's (American Depository Receipts) on the NYSE, which provides them with more exposure in international markets.
China Mobile, China's largest cellphone service provider, is a perfect example.
A few scandals involved with Chinese overseas-listed companies, such as China Aviation Oil, may tarnish somewhat the impression of mainland companies as a whole. Experts say that is understandable.
"We have our own scandals in Western companies," Berman said. "Witness Enron, WorldCom, Parmalat and Tyco, among others. So scandals know no borders."
O'Connell said there is a genuine concern the management (executives and directors) of many Chinese companies do not fully understand what being "listed" on NASDAQ, for example, entails.
In other words, such a listing provides more than the benefit of additional capital and the possible ongoing source of capital, it entails serious obligations to accurately report the ongoing condition of the company to investors, the necessity of fully disclosing the company's intentions, for example, its use of proceeds from the sale of its stock, he said.
The tradition of a company being run for the benefit of public shareholders as opposed to insiders, Berman said, is a relatively new concept in China. It will take time to take hold.
"When we look to invest in companies with Chinese exposure, we usually choose Hong Kong-based companies.
In Hong Kong, the regulatory approach is excellent, efficient, yet well-developed. So, Hong Kong-based companies offer good advantages," Berman said.
Chinese companies are also advised to learn and understand the rules of the Sarbanes-Oxley Act in the United States, which imposes strict standards on the boards of companies listed in the United States.
The relatively new rules, implemented in the aftermath of the Enron and WorldCom scandals in 2002, are widely considered to be a must-read for listed firms' chief executives.
"Sarbanes-Oxley is making listings tougher for all public companies," Berman said.
Chinese companies should beef up their regulatory controls and internal auditing procedures. They should also appoint compliance officers, who are well versed in the new regulatory standards, he said.
In addition, they should hire a US-based law firm that specializes in Sarbanes-Oxley compliance to steer them through the complexities, he continued.
O'Connell said executives and boards of directors of Chinese companies, as well as their financial and legal advisors, need to be fully aware of the tremendous burden Sarbanes-Oxley places on public companies institutionally and the individuals in their capacities.
In the last year or so, numerous smaller US companies have de-listed and "gone private" because of the time and tremendous costs they associate with complying with Sarbanes-Oxley.
In connection with a NASDAQ listing, for example, Chinese companies must be prepared to have US legal counsel and US auditors to assist not only with the public offering, but with ongoing compliance, he said.
These companies must recognize the need for fully accurate audited financial statements, as well as full disclosure of ongoing developments (even, for example, the mere possibility that something might occur) in short, anything that a reasonable investor might view as being important to him in determining whether to buy, or sell, the company's stock.
"It is obviously tough for new and small companies to meet these requirements, but they might as well do it sooner rather than later," Berman said.
"Any company that aspires to be a public multinational will have to do so at some point anyway. And any company that wants to play in the big international league will have to bite the bullet!" he added.
(China Daily 04/13/2005 page3)
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