Chinese IPOs don't signal end of problems
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By Frank Ching
The end of China’s 14-month-long IPO freeze in January, following reforms initiated by the Chinese Securities Regulatory Commission, has been accompanied by a flurry of listings of Chinese companies in the United States, indicating renewed American investor interest in China plays after several years of distinct coolness in the aftermath of dozens of Chinese listed companies being accused of fraud in 2011.
In fact, in the last few years, there have been more de-listings of Chinese companies on the American exchanges than new listings, as few sought an IPO in the United States.
Weibo Corp., the company that runs China's main micro-blogging service, began trading on Nasdaq.
Soon, the e-commerce giant Alibaba Group Holding Ltd., is expected to be listed on the New York Stock Exchange. However, this does not mean by any means that the clouds have lifted. Far from it.
For the last few years, the American investing public shied away from Chinese companies after stories such as that of Puda Coal, whose chairman, Ming Zhao, was charged by the U.S. Securities and Exchange Commission with defrauding investors by secretly transferring the controlling interest of the company’s sole coal mine to himself.
A number of other Chinese companies have also been charged with fraud, including Longtop Financial Technologies, whose shares were traded on the New York Stock Exchange, and Sino-Forest, traded on the Toronto Stock Exchange, which filed for bankruptcy in Canada.
Hopefully, the quality of Chinese companies is much higher now. Certainly, within China, the CSRC has reformed the process for approving IPOs to be listed in Shanghai or Shenzhen. The regulatory agency stopped accepting new applicants in 2012 while it instituted a new system under which emphasis is placed not on its approval but on company registration and the disclosure of information, while leaving decisions to investors.
Because of the freeze in IPOs, there is now a backlog of many hundreds of companies seeking to raise capital. However, a significant number of companies have withdrawn their applications, apparently to ensure that the information they provide is accurate.
The CSRC’s reform is in line with a decision made in November by the third plenary session of the Communist Party’s central committee that the market should play a “decisive” role.
In fact, the stock market reform is an indication that thoroughgoing third plenum decisions are being gradually implemented.
As far as listings in the United States are concerned, one major unresolved issue is ensuring the quality of the audited information available.
The Securities and Exchange Commission has asked accounting firms for auditing paperwork in cases of suspected fraud. However, the Chinese affiliates of the “Big Four” accounting firms ― PricewaterhouseCoopers, KPMG, Ernst & Young and DeloitteTouche Tohmatsu ― have all declined, citing Chinese law on state secrets.
As a result, the SEC took action in December 2012 against the accounting firms and, this January, an administrative law judge, Cameron Elliot, ruled against the four firms and ordered that they be banned from auditing U.S.-traded companies for six months. The firms have appealed and the suspensions will not come into effect until appeals are exhausted.
U.S. regulatory authorities have discussed the situation with their Chinese counterparts. In May, a memorandum of understanding on enforcement cooperation was signed by the Public Company Accounting Oversight Board, which oversees the audits of public companies to protect the interests of American investors, and the Chinese Ministry of Commerce and the China Securities Regulatory Commission.
The agreement is understood to allow limited documents to be handed to the U.S. after first being checked and, if necessary, censored, by Chinese regulators.
A few months later, the SEC reported that its dispute with Deloitte over Longtop had been resolved because it had received relevant papers from Chinese regulators.
Papers of some other companies were also said to have been received or are in the pipeline.
However, after Judge Elliot’s decision, the Chinese regulator said on its microblog that the judge had “ignored” China’s efforts and the progress that had been made.
Chinese officials are always extremely sensitive to foreign authorities, including judges, who make decisions that have implications for what China considers to be matters of sovereignty, including what may or may not constitute state secrets.
But unless there is a procedure established whereby American regulatory authorities can have unimpeded access to audit working papers involving companies listed in the United States, Chinese companies will find it difficult to raise capital on American exchanges and those that are already listed may encounter serious problems in the future.
Frank Ching is a journalist and commentator based in Hong Kong. Email the writer at frank.ching@gmail.com. Follow him on Twitter:@FrankChing1.