Actions always speak louder: Eyeing a total of US$22 billion in new share issues in 2004, up to 20 Chinese companies are getting ready to list in overseas markets.

China is apparently leading a new round of initial public offerings (IPOs) planned for global equity markets.

Amid the uncertain global economic landscape, China’s economy continues to grow at a fast pace. Overseas investors have been taking notice, sparking a rally of China’s shares in global markets and attracting more IPOs.

“China’s fast-rising economy attracts foreign attention. The economic power China has displayed in recent years is one of the most important momentums driving the overseas IPO rush,” Daniel Roules, managing partner of Squire, Sanders & Dempsey LLP at Beijing, told China Business Weekly.

While Chinese firms need more funding for expansion, the rush for overseas listings follows the demand for equity funds from overseas investors.

US capital markets began to recover about six months ago, creating a window of opportunity for Chinese firms hoping to get listed in the United States.

Reena Aggarwal, professor of finance with the McDonough School of Business at Georgetown University, told China Business Weekly, “There are very few US companies doing IPOs and so the focus is on international companies, particularly Chinese companies.”

Four Chinese companies issued American Depository Receipts (ADRs) in the United States last year, when the ADR trading value for China was already one of the largest in the US markets. The Chinese ADR index has risen by 84 percent during the past year.

“All of these indicators show strong appetite for Chinese securities,” said Aggarwal.

Experts said global listing also gives more exposure to domestic companies, and improves their reputation. It is a good way to give listed companies more information about foreign markets.

“Peer pressure is an important factor driving China’s overseas IPO rush,” Pamela Mar, associate director of China affairs with the World Economic Forum, told China Business Weekly.

“Overseas listings could be very good advertising for those companies to build up images in domestic markets,” said Mar, also the coauthor of Recreating Asia: Visions for a New Century.

Looming bubbles?

As Chinese shares are becoming increasingly attractive for overseas investors, a common question naturally occurs: Is there also a bubble swelling beneath this round of IPO fever?

“We do not view China as a bubble,” said David Pasquale, a New York-based expert with The Ruth Group.

“This is a market driven by demand reflecting growth prospects for the region, increased transparency at the company level and increased corporate governance.”

Most experts agree that China’s overseas IPO rush will continue as long as the country’s galloping growth is not stopped.

“This is not like the dot-com bubble when IPOs rose 600 to 700 percent on the first day of trading and the issuing firms had no profits,” said Aggarwal.

“China Life was a strong IPO but rose a reasonable 34 percent on the first day of trading. On the other hand, China Telecom’s IPO did not do well,” she added.

Still, according to Jorge Pinto, director of the Center for Global Finance at Pace University’s Lubin School of Business in New York, it is always good for investors to look at the fundamentals of the companies in which they are planning to invest to avoid paying for overvalued assets.

“When you have a wave of investments or a market that is hot, valuations tend to be rich and with time overvaluation happens. This is something that could be happening in China now,” he said.

“Market bubbles are dangerous since investors tend to overlook this phenomenon. Herd mentality and greed tend to blind investors and analysts.”

In general, experts agree that, with the number of Chinese firms listing overseas, foreigners have a good understand of them. Although they may not know Chinese companies as well as Western ones whose products they use every day, most of sophisticated investors tend to be long-term players.

“The United States also has stricter information requirements for the companies, banks involved in promoting these shares are responsible for marketing these companies. Foreign investors are rational in their investment decisions,” said Hung-Gay Fung, professor of Chinese studies at the University of Missouri -St. Louis.

Experts said Chinese companies should learn the importance of investor relations as a means of staying close to the investors they are targeting, a matter of particular importance with foreign investors. This helps generate goodwill and higher share valuations. 

Never a straight path

Despite the overall enthusiasm for Chinese shares, China Inc. is finding out that the path to Wall Street is never straight. 

China’s biggest chip maker and its top life insurer found out that any signs of accounting weakness or management confusion are pounced on by investors willing to slash share prices or launch lawsuits.

US investors, worried about a controversy over an executive’s comments, sent shares in Semiconductor International Manufacturing south on its debut last Wednesday.

The shares fell 11 percent on their New York debut and 7 percent in Hong Kong trading when investors got spooked after the company said last Tuesday its chief financial officer made “inaccurate statements” about having sufficient capital to meet planned expenditures through 2005.

Meanwhile, last Thursday, China Life Insurance said it faces a lawsuit filed by US shareholders that accuses it of not adequately disclosing an audit report that uncovered accounting irregularities worth about 5.4 billion yuan (US$652 million) at its state-owned predecessor.

The company, which raised US$3.5 billion in the world’s biggest IPO last year, said it would “vigorously” contest the lawsuit.

It also warned that, “given the nature of litigation in the United States, the company expects that further lawsuits may be filed containing the same or similar allegations.”

Shares in China Life slipped 2 percent to HK$5.15 (66 US cents) last Thursday in Hong Kong, still 43 percent above the IPO price.

Concerns have been raised on whether the two incidents would dampen prospects for Chinese companies in their overseas IPO dreams.

“We hope there will be little impact, but it is still too early to tell whether this will affect the prospects of other China IPO candidates later this year,” Steve Toronto, managing partner of the Beijing office at the Morrison and Foerster LLP, told China Business Weekly.

“There are always many possible reasons behind a stock’s performance. There are always fluctuations in the securities markets.”

Toronto said that the China Life story is not uncommon in the US stock markets, even expressing surprise that it took so long for such a case to be filed.

“The China Life story is unique because it is probably the first Chinese state-owned company listed in the US market to encounter this type of lawsuit. But lawsuits of this type can happen to companies anywhere in the world.”

(China Daily April 2, 2004)