China corporate governance report: foreign listings

While disclosure and other governance requirements on the Shanghai exchange, and in Chinese corporate life generally, are moving closer to international norms, it is still an encumbrance for local firms to take the step to be compliant with these international exchanges. The local markets increasingly give them a source of capital that would allow them to stay at home if they wanted to. But, so long as international investors can’t access mainland stocks straightforwardly, Chinese companies are likely to continue to be willing to put the work in to meet these international exchange standards. “You have to pay this cost if you want to keep a good image for the public,” says Fu Chengyu, CEO and chairman of CNOOC, which is listed in Hong Kong and New York. “In each market the regulators have different requirements: sometimes they have big differences which means you are doubling your efforts. But this is part of the costs you have to incur.” (Interestingly Fu believes US regulations are causing it to lose its competitive edge; see the interview on page xx for more on this.)

The exchanges themselves – who need Chinese companies to keep listing in order to provide revenue – emphasise the benefits for Chinese companies (or any companies) to listing there. One unarguable point is that exchanges like Hong Kong, Singapore and New York have well established legal systems based on (in Singapore and Hong Kong’s case) English common law, and US law in New York. That’s something China doesn’t have and is unlikely to in the foreseeable future, and it is a comfort to investors. Then there’s free flow of capital and information: for as long as the renminbi is non-convertible, and repatriation of foreign currencies out of China requires regulatory approval, foreign exchanges have an advantage here for international investors. Exchanges also point to acceptance of international accounting standards, a sound regulatory framework at international standards, and advanced clearing and settlement infrastructure.

From the exchanges’ perspective, there is another question: are Chinese companies more troublesome? Here, the answer seems to vary. Hong Kong’s exchange reported six cases of public sanction involving mainland issuers to the China Securities and Regulatory Commission in 2008, representing 40% of the total number of cases resulting in public sanction. That’s in line with their overall representation in Hong Kong, although the sample size is too small to draw a conclusion. “On the whole, however, taking into account inquiries and investigations that have not led to public sanction, mainland issuers are probably coming to the exchange’s attention slightly less frequently than other companies,” says HKEx.

In Singapore, though, the situation looks a little different. Singapore Exchange declined to comment for this article, but the fact is S chips have frequently been in the news for the wrong reasons over the last year. Shares in FibreChem Technologies and China Sun Bio-Chem have been suspended from trading this year following alleged accounting irregularities. Both are Chinese. Additionally, renewable energy firm China EnerSave has defaulted on a loan repayment, as has one of its subsidiaries; and Oriental Century, partly owned by Singapore’s Raffles Education, has said its chief executive “substantially inflated” the company’s balance sheet for its 2008 full year results. It’s been sufficiently troubling for Singapore’s senior minister and former prime minister, Goh Chok Tong, to call on Chinese authorities to maintain “stringent supervision” over companies that list in Singapore. Goh chairs the Monetary Authority of Singapore, Singapore’s central bank and financial regulator; he added: “If they allow a small percentage of those companies to defraud investors, that’s going to spoil the reputation of other Chinese companies, good companies, listed in Singapore.”

Enforcement is tricky for these exchanges: the companies themselves aren’t physically there to be supervised. But as HKEx says: “enforcement strategies are not driven by reference to the location of the listed companies. The enforcement policy and procedures are no different for a local or mainland company.” Foreign listings bring greater exposure for Chinese companies, but with it comes scrutiny – an important trade-off.

This article was one of several chapters in a detailed guide to corporate governance in China published with the June 2009 edition of Euromoney