CSRC needs to improve internal control

May 10, 2016 16:10
The China Securities Regulatory Commission is worried over the impact of US-listed Chinese companies relisting in the A-share market.  Photo: CNSA

The Shanghai Composite Index tumbled 2.8 percent on Monday, and lost nearly 6 percent in the last two trading sessions.

Shell stocks or potential shell plays suffered the most after the top securities regulator warned last week that it would review the negative impact of the relisting of Chinese companies already listed overseas.

Rumors have circulated on WeChat since Thursday afternoon that an official of the China Securities Regulatory Commission (CSRC) said at an internal meeting that a number of US-listed Chinese companies have sought privatization and are preparing for a relisting as A shares through a backdoor listing, and that the regulator should carefully study the impact.

Last Friday, CSRC spokesperson Zhang Xiaojun told a media briefing that the regulator is studying the market impact of overseas-listed Chinese companies relisting in the A-share market through initial public offerings, mergers and acquisitions, as well as restructuring.

It seems that the CSRC has no strong stance on the issue, let alone any related policy or measure. At the moment it just wants to look into the issue.

Right now, there are around 30 US-listed Chinese companies that are in the process of coming home to relist on mainland exchanges, including Qihoo 360, Bona Film Group and Perfect World.

Most of these companies enjoy solid earnings, aside from the fact that they have survived the tough US regulatory framework.

These companies of good quality could help improve the overall quality of the A-share market.

They had opted to list in the United States because the domestic market back then had yet to accept the variable interest entity (VIE) structure. But that roadblock has since been removed.

However, there are some hidden problems behind the trend. The market capitalization of big US-listed Chinese companies like Alibaba and Baidu exceeds 3 trillion yuan (US$460 billion).

That could lead to massive foreign exchange loss because these companies need to use the renminbi to acquire US dollar-denominated floating stocks.

Also, the domestic market may struggle to absorb another round of IPOs by hot tech companies.

Some of these companies have used the backdoor to relist at home. There are many gray areas in the process.

The CSRC has the responsibility to crack down on shell-company speculation and practices harming minority shareholders.

In fact, the homecoming of US-listed stocks is not new.

A number of US-listed Chinese stocks have been targeted by short-sellers since 2012. This has weighed on their valuation, and prompted several of them to decide to come home.

More than 30 US-listed Chinese stocks have completed the privatization process since the CSRC eased rules for companies using the VIE structure last year. This indicates that the securities regulator has responded too slowly.

Recent remarks from CSRC officials have put some of these companies in a dilemma. Many of these companies have borrowed bridging loans or signed contracts with private equity funds.

They might lose everything if they fail to re-list on the A-share market.

Nevertheless, some market participants believe the CSRC won’t adopt a “one-size-fits-all” approach to stem the homecoming trend.

Instead, it is more likely that the CSRC would tighten regulation and approvals to crack down on excessive shell speculation.

The CSRC have noted the leakage of internal information a few times. Internal comments and plans have found their way into social media, after which the official spokesman would confirm them.

The securities regulator needs to rectify its internal control system as well as review the homecoming trend to reassure investors.

This article appeared in the Hong Kong Economic Journal on May 10.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist