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Chinese firms shunning Wall Street for their IPOs

People line up at a bank in Hong Kong to pick up applications to buy stock in the Bank of China on May 18. The bank will launch its US$9.7 billion float in the territory today, the latest in a wave of Chinese firms to list in Hong Kong. PHOTO: AP

When Chinese firms like the state-owned oil company PetroChina Co (中國石油天然氣) or Internet startup Baidu.com Inc (百度) wanted to go global and raise cash on a stock market, they launched their initial public offerings on Wall Street.

But that's not what the Bank of China (中國銀行) plans to do today with its IPO -- the world's biggest in six years. The bank, China's No. 2 lender, is listing US$9.7 billion worth of its shares only on Hong Kong's stock exchange underwritten in part by Merrill Lynch & Co, Deutsche Bank AG and Credit Suisse Group.

The IPO is part of a recent wave of Chinese firms that are skipping New York entirely. Hong Kong's new popularity for the mega IPOs is seen by some as the latest trend in globalization -- the rise of a new world with many financial capitals.

"The fact that so much foreign money and institutional investment is placed in the Hong Kong stock market proves the confidence of international investors in our system," Hong Kong's Secretary for Financial Services Frederick Ma (馬時亨) said in a recent speech to business leaders.

"Hong Kong is the last market in Asia that doesn't require large companies to report quarterly. It's because of resistance from the tycoons. That can't last much longer."

David Webb, retired investment banker

But skeptics argue that the Chinese firms -- called "red chips" and "H-shares" in local lingo -- don't dare list in the US because their finances are as murky as a bowl of sweet-and-sour soup. The critics say Hong Kong's less rigorous financial disclosure regulations mean fewer headaches for the firms.

David Webb, a retired investment banker and shareholder activist, said Hong Kong's stock exchange has some serious catching up to do with other global markets. He said new rules are needed to protect shareholders' rights and to require faster reporting.

"Hong Kong is the last market in Asia that doesn't require large companies to report quarterly. It's because of resistance from the tycoons. That can't last much longer," said Webb, who serves as an elected non-executive director of the Hong Kong Exchanges & Clearing Ltd, the listed firm that operates the stock exchange.

Webb said the rules also allow companies -- especially state-run Chinese firms -- to raise cash from a public listing and loan the money to an unlisted parent company or other related business in which the shareholder has no economic interest.

"So there's a risk that by co-mingling, by mixing up the money of the listed company and the parent, that you can end up with bad debt," he said.

Other issues critics say need to be addressed are:

One, companies can wait four months to report annual results when the international norm is 60 days.

Two, shareholders can't bring class action lawsuits in Hong Kong, so corporate collapses caused by wrongdoing rarely result in shareholder litigation.

Three, listing rules aren't statutory so a company's leaders can't be fined or jailed for breaking them.

But the exchange said in a statement that Hong Kong has adopted international accounting examples and its market is "open, fair, effective and transparent." The exchange added that it's also appealing to Chinese companies because of its proximity to the mainland and the large pool of investment bankers here.

"There are no foreign exchange controls. There is no capital gains tax," the statement said. "There is no withholding of income in respect of taxes."

Many of the Chinese firms have been scared away from US markets by the tough Sarbanes-Oxley anti-fraud law, said Steven Cheung (張仁良), a professor of finance at City University of Hong Kong and a specialist in the development of financial markets.

The law went on the books in 2002 after a string of corporate scandals, including the Enron Corp meltdown. The measure's sweeping reforms require CEOs and chief financial officers to certify in sworn written statements the accuracy of the company's financial results -- with possible prison terms for signing statements they knew to be false.

"For these Chinese enterprises, it takes time to catch up with the latest developments in corporate governance practices," Cheung, said. "If they had to comply with the Sarbanes-Oxley act, I don't know how long it would take them."

Thirty-eight Chinese companies now trade on US stock exchanges, as do 19 companies with headquarters in Hong Kong, according to Associated Press data.

New York Stock Exchange (NYSE) chairman Marshall Carter testified before a congressional committee on April 26 that tougher regulations have hurt the exchange's pursuit of foreign IPOs.

Almost half of non-US companies going public did so on the NYSE or NASDAQ in 2000, but that number plunged to 5.7 percent last year because of "US regulatory rules and oversight," he said.

But the US won't relax its regulatory standards just to recapture any IPO business heading to foreign markets, Christopher Cox, chairman of the Securities and Exchange Commission, said April 25 in testimony to a Senate committee. He warned of "a race to the bottom" if the US were to do so.

Hong Kong ranked No. 5 in the world last year in share issuance, raising HK$292.5 billion (US$37 billion), after the New York Stock Exchange, Euronext (the Paris, Amsterdam, Brussels and Lisbon exchanges), the London Stock Exchange and Toronto's TSX Group, said the exchange, citing the World Federation of Exchanges.

Ma said those who only focus on governance and transparency issues don't understand the numerous other factors that make Hong Kong appealing to Chinese companies -- including the fact that professional and underwriting fees in the US are double the cost in Hong Kong.
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