The China Securities Regulatory Commission (CSRC) might have lifted the suspension on A-share IPOs but according to some of the region's top equity-markets lawyers many Chinese companies will continue to list on overseas exchanges rather than at home - at least for the foreseeable future.
In September last year, with the Chinese equity markets plunging to record lows, the CSRC called a halt to A-share IPOs, reasoning that any further pressure on liquidity would only drive stocks lower. When the ban was lifted in June, new market regulations were introduced. V&T law firm's partner Xu Shouchun told ALB China that these new rules consisted of four measures.
The first of these, he said, was "to improve the quotation restraint mechanism of inquiry and subscription, and require the target of inquiry to quote truthfully". This would presumably stop the practice of companies listing at a low price in order to see significant gains when trading in their shares commences. However, Xu said that the measures also aim to optimise the online IPO mechanism, by separating the targets of online and offline subscriptions; and they set an upper limit for single online subscription accounts, so that a single investor may only use one qualified account when subscribing to new shares. The new regulations are also aimed, he says, at informing all participants of the market risks, so that investors approach new offerings are better informed.
Xu told ALB China he expects these measures will correct some "fundamental problems" that have restricted the development of the Chinese share market to date and that this, along with China's relatively high rate of economic growth, will encourage Chinese investors to buy stock, even in the midst of the current financial crisis - not that too many potential investors need encouragement just now. The SSE Market Composite has risen by some 57% over 2009, making Chinese stocks some of the world's best performers. Companies, it seems, are queuing up for a piece of the action: since late June some 30 enterprises have reportedly received regulatory approval for an A-share listing and up to 400 more are still waiting.
But if the length of that queue suggests that Chinese companies have been holding off listing for the past nine months until the moratorium on A-share IPOs was lifted, nothing could be further from the truth. The ban coincided with a spate of Chinese companies listing overseas, including state-owned enterprises like China Mobile and CNOOC. PRC- and Hong Kong-based lawyers have been busy advising on a number of listings of Chinese companies on Hong Kong's stock exchange. And then there was the high profile and highly successful Changyou.com listing on Nasdaq.
This sort of 'share market shopping' is a trend that JSM Mayer Brown partners Mark Uhrynuk and Jeckle Chiu think is set to continue. However, Uhrnyuk and Chiu warn that it is too simplistic to think that the moratorium on A-share IPOs drove companies overseas. Instead, they point out that the phenomenon of Chinese companies listing overseas has been happening since well-known brewer Tsing Tao listed on Hong Kong's stock exchange in 1993.
"Often, what drives a company to consider various markets - particularly in the case of China - can be the legal restrictions which dictate where they can go," Uhrnyuk said. "It's not just the restriction on the possession of A-shares [foreigners are not permitted to trade in RMB-listed A-shares on China's stock exchanges]. What drives a company to a particular market may be its intended shareholder profile, what its desire for liquidity is, and whether it wants to list in a market that is lightly or heavily regulated."
Herbert Smith's Michael Fosh echoes this sentiment. "The choice of market for PRC companies is a function of various factors, not least the approval of the CSRC," he said. "Except for red-chips (existing restructured companies with offshore holding companies), PRC companies need the approval of the CSRC to list either on a domestic PRC market or offshore. CSRC approval, and approval for a particular market, also depends on a number of factors, including suitability for listing and, I believe, policy considerations. A de facto moratorium on domestic IPOs does not, therefore, automatically translate into the choice of an overseas listing. For larger, state-owned companies in particular, the policy considerations as to listing venue will be more pronounced. At the same time, whilst an effective moratorium has existed in the PRC, there does need to be an outlet for PRC companies to raise finance from public markets and so, depending on market forces and valuations, it is natural that some Chinese companies would go overseas if allowed."
But now that the moratorium has lifted, V&T's partner Xu believes Chinese firms will begin to see more benefit from listing at home - particularly as the resumption of A-share IPOs has been accompanied by some regulatory changes that seek to reduce price volatility and prevent distortions in the market such as the deliberate underpricing of shares at first offering. Michael Fosh is not quite as optimistic that the huge price rises on the first day's trading will be curtailed. "The PRC market is still potentially very volatile, even though it has been one of the best performing markets this year," he said.
Another major concern still exists, according to Mark Uhrnyuk. Even with the suspension, resumption and regulatory changes, the main obstacle holding back PRC equity markets, he says, the long-standing structural problems concerning the country's foreign exchange market. "The real impediments and obstacles are not the suspension or the resumption," he said. "This is just an interim measure. There's an evolution going on [in the development of China's equity markets] over time and we're not quite sure where it will lead. The suspension was driven by just one market event."
By Ralph Grayden
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