Confidence Crises Threaten Chinese Listings Abroad


Foreign capital markets appeal strongly to Chinese enterprises for their scale, high efficiency and good services. Chinese enterprises now seek listings on foreign stock exchanges as the best way to do business abroad, the United States the most favored destination.

In 2013, 66 Chinese enterprises were listed abroad, accounting for 15.1 percent of the global total of newly listed companies. They raised a cumulative US $19.012 billion, making up 18.9 percent of the world total.

The first half of 2014 witnessed the successful listing of 10 Chinese enterprises in the U.S., and the raising of US $3.1 billion, a year-on-year growth of 900 percent and 3,830 percent respectively. Then in September 2014, China’s e-commerce giant Alibaba made its initial public offer (IPO) on the New York Stock Exchange, raising US $21.8 billion, a historical record in the U.S.


Confidence Crisis

Despite the increase in overseas listings, Chinese companies still need to take a hard look at the confidence crisis that embroiled some of them in the U.S. three years ago. This will help them gain insight and experience when doing business in the international capital market. Such a review will also help international investors understand the problems that Chinese firms encounter when they integrate with the world economy.

The most recent crisis began in October 2010. Over the following five months eight Chinese firms were delisted from the U.S. In March 2011, the situation deteriorated further. From March to June, 24 Chinese companies listed in the U.S. suffered from auditors who resigned or exposed their financial problems, and 19 were suspended or delisted. American critics exaggerated these cases, highlighting deception by Chinese companies and fanning the flames.

In the following months the mistrust of small and medium-sized Chinese reverse takeover (RTO) firms gradually escalated into a crisis affecting all Chinese concept stocks. Stockbrokers adjusted their policies, and the American supervisory body adopted much stricter requirements towards Chinese firms engaged in RTO, and investigated two Chinese concept firms.

Adversely influenced by these factors, Chinese concept stocks plunged, even those innocent of financial fraud. Of the 13 Chinese firms listed in the U.S. in 2011, 12 fell below their asking prices.


Lessons Learned

Thorough examination of the crisis could help pinpoint the reasons and lessons behind it.

First, it must be acknowledged that the actions taken by the U.S. Securities and Exchange Commission (SEC) and security broking institutions all fell under the category of normal supervision and investment practices. The SEC’s warnings and investigations are part of its regulatory duties. Moreover, U.S. brokers were reasonable in banning clients from borrowing capital to buy Chinese concept stocks. Deleveraging was not in particular targeting Chinese firms, and shortselling is a normal practice in the American capital market. The overall situation was not out of hand, as China concluded. After all, of the Chinese firms listed in the U.S. fewer than 10 percent faced credit problems, and as a result were suspended or delisted.

Second, the confidence crisis can be ascribed to several reasons. Some Chinese firms were fraudulently listed; some were deceived by malignant intermediaries due to lack of experience or expertise in international listing and financing. Finally, internal problems within the capital market also contributed to the crisis.

In a nutshell, although triggered by strict supervision of overseas markets and fueled by speculation, the confidence crisis reflected differences in the Chinese and American corporate cultures and legal systems. The crisis damaged the image of Chinese businesses and reduced investor confidence in China and Chinese firms. However, it also had a positive outcome in prompting Chinese enterprises to better regulate themselves, as well as compelling the Chinese government to strengthen supervision.


Long-term Mechanism

As the frenzy for overseas listing reemerges, Chinese enterprises hoping to be listed abroad are paying more attention to their investor relations management, and have tightened scrutiny of their agencies and lawyers. Today Chinese firms are more likely to be transparent, abide by international rules, and are building on their emergency and crisis response capacity.

1   2