China corporate governance report: foreign listings

Euromoney guides, June 2009

For many years now, Chinese companies have been seeking a home away from home. Investors can access Chinese companies listed in Hong Kong, Singapore and the United States, making these companies open to investors the world over.

Doing so has a number of advantages for Chinese companies. Most obviously, it provides an additional source of capital, increasing dramatically the potential investor base. But in addition, the fact that these markets are known for their long and respected track record and their regulatory stringency gives a sense of legitimacy to Chinese companies in the eyes of international investors.

Hong Kong is the most obvious and natural home for these companies. They come in two main forms. H-shares are mainland companies who are listed on the Hong Kong Stock Exchange. Red chips are those that are Hong Kong companies but with majority ownership by shareholders within China. According to Hong Kong Stock Exchange, by the end of March there were 150 H shares and 96 red chips. A further category, non-H share mainland private enterprises, constitute a further 224 stocks typically smaller than those in the other categories; between the three groups they represented 37% of the 1266 companies listed on the exchange.

In fact, China’s dominance of the Hong Kong market is bigger still than that, since many H-shares are extremely large, such as China Mobile. In fact, they account for 60% of Hong Kong’s total market cap, and they’re also the most actively traded stocks: 70% of total equity turnover value as of March.

The march to Hong Kong can be clearly seen by comparing the picture to five years earlier. There were 264 mainland companies listed then, accounting for 25% of listed companies and 30% of market cap.

Singapore has built its own niche in attracting Chinese companies, in particular private sector enterprises that are typically smaller than the big state-owned behemoths that have traditionally gravitated to Hong Kong. Some of these private companies feel they would be lost among the state-owned giants in Hong Kong, and consequently hope they can get more investor attention in Singapore. There are over 100 of these S-chips listed on Singapore Exchange.

Still more have opted to launch American depositary receipt listings on the New York Stock Exchange, or to list on Nasdaq or the American Stock Exchange. The Halter USX China Index, which only tracks Chinese companies with a market capitalisation of more than US$50 million with listings on NYSE or Nasdaq, and even then only subject to selection committee approval, tracks 100 stocks on its own. Bigger examples include CNOOC, China Telecom, China Unicom and Sinopec.

How big a leap is it for Chinese companies to meet the disclosure and corporate governance requirements of big exchanges like Hong Kong? “It varies,” says HKEx in detailed written responses to questions from Euromoney. “It is probably easier for a larger mainland enterprise that has senior management and advisers with a lot of Hong Kong market experience to meet the listing requirements than it is for a small Hong Kong-based company with less experienced staff and advisers. Generally, it has probably become easier for mainland enterprises to meet the Hong Kong listing requirements than it was 15 years ago since there are more people with Hong Kong market experience working at mainland enterprises and advising them now than there were in 1994.”

This is almost certainly true: after all, the laws that Chinese enterprises operate under have changed dramatically in that timeframe, as described in an earlier chapter. HKEx notes this too. “Mainland authorities have made great efforts to align mainland law and regulation with international standards,” it says, citing the Basic Standard for Enterprise Internal Control, released in June 2008 and effective from July 1 this year, as an example. (See the earlier chapter for more on this.)

For some companies this means that international compliance is not such a big stretch. Ping An, for example, is listed in Hong Kong, has a level one ADR issue in New York (so not a full listing but a method of reaching institutional investors), and a POWL listing in Japan, requiring it to be compliant with all three sets of regulations. “We believe the regulatory environment is quite similar,” says Jin Shaoliang, head of the group board of directors office at Ping An in Shenzhen. “Of course there are differences between the Hong Kong and Shanghai stock exchanges, but for our company we have clear rules and we follow the most stringent ones no matter what the differences between the exchanges.”