Risks of U.S. Listings by China’s Companies
By JOHN ROSS
China is the only one of the world’s three largest economies in which a significant number of its most important companies are listed on share markets outside direct regulatory control of their home country’s main financial administration. Almost all major U.S. companies are listed in the U.S. The same applies in Japan. But many Chinese companies are listed in Hong Kong, part of China but with separate regulation and capital markets from China’s mainland economy. Furthermore a significant number of Chinese companies are listed in London and the U.S.
This was highlighted by Alibaba’s IPO on the New York Stock Exchange. Alibaba became the history’s largest IPO. But this success was only the latest upswing of a roller coaster record of U.S. listings by China’s companies. The wild oscillations raise two questions:
Immediately, what can be done to minimize risks for U.S. listed Chinese companies?
Over the long run can these risks be controlled – is it strategically sensible for China, and for China’s companies, to list in the U.S.?
Analyzing short-term risk, recent IPOs are not the first time Chinese companies have rushed to U.S. listings. In 2008-2011 over 60 Chinese companies listed on U.S. exchanges – 38 in 2010 alone. But by 2012 this had collapsed to two new listings. This precipitate fall accompanied accounting and other scandals.
Most notorious, affecting sentiment towards U.S. listed Chinese companies, was Sino-Forest – although it was listed in Canada. In 2011 Muddy Waters Research, the short selling firm, accused Sino-Forest of fraud. Sino-Forest’s shares fell and eventually the company filed for bankruptcy. Other U.S. listed Chinese companies were hit by auditor resignations, stock delistings, and investigations by the U.S. Securities and Exchange Commission (SEC).
Particularly severely hit were Chinese companies practicing reverse mergers – buying listed U.S. companies, thereby avoiding regulatory procedures associated with IPOs. Amid scandals 82 companies in the Bloomberg Chinese Reverse Mergers Index lost 52 percent of their market value in June and July 2011. This was followed by severe falls in the overall value of U.S. listed Chinese companies. The China Development Bank then supplied funds for Chinese companies to buy back shares and leave U.S. markets.
This led to a regulatory clash between China and the U.S. The SEC wanted audit documents from China which international auditors could not give as that violated Chinese law.
In this context Alibaba’s original intention was not a U.S. listing. The company originally investigated listing in Hong Kong, but abandoned this as Hong Kong’s exchange prohibits guaranteed company control by a preferred shareholder group which Alibaba wanted – in line with Facebook and Google.
In the short term China’s companies have learned to avoid the risks which led to the 2010-2011 debacle. Reverse takeovers have been abandoned as a strategy, it is understood major accounting irregularities will be discovered, Muddy Waters type short seller risks are well known. Against a backdrop of strong rises in U.S. stock markets, shares from Chinese companies began to outperform again – a new upswing of the roller coaster after precipitate descent. By the end of 2013, as Dhara Ranasinghe of CNBC noted:
“Shares of Qunar Cayman Islands more than doubled in their U.S. debut… valuing the Chinese travel website controlled by Internet giant Baidu at US $1.05 billion. Shares of 58.com, a classifieds website… soared more than 45 percent when they started trading.”
By the beginning of 2014 the Financial Times found the eight Chinese companies going public in the U.S. in the previous year usually delivered gains of over 10 percent on their debuts. The 55 biggest Chinese stocks listed in the U.S. climbed 18 percent over the previous two years. Alibaba’s successful IPO therefore came on the crest of short-term spectacular gains by U.S. listed Chinese companies.
But warning signs are beginning. In December, less than three months after Alibaba’s IPO, an advertising campaign was launched against it by U.S. retailers. As the Financial Times noted: “Bricks-and-mortar retailers… have now turned their fire on Alibaba…”
“A campaign group whose members include Target, Best Buy, Home Depot and JC Penney have aimed their ad at U.S. lawmakers, claiming that Alibaba will ‘decimate’ local retailers unless a new law can be passed to prevent online shoppers avoiding sales tax…We believe it’s just a matter of time before Alibaba exploits this loophole.”
This attack was a political manoeuvre. Alibaba’s U.S. retail presence is insignificant compared to Amazon, but politically U.S. retailers found it more convenient to attack a Chinese company. The effect of politically inspired campaigns, if backed by the U.S. government, is shown in such successful Chinese companies as Huawei and ZTE being effectively shut out of the U.S. market.
