Published October 27, 2008

More cause to review policy for China listings

By LYNETTE KHOO

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WHEN the storm comes, those without a firm foundation crumble. Perhaps that speaks of the plight of some Singapore-listed Chinese firms, or S-share companies, now.

Tighter regulation needed: China Energy has not been penalised for not meeting certain conditions set out in the IPO prospectus

Jitters over Chinese listings have risen as another slew of negative news from these companies hit home last week. Steelmaker Delong Holdings slashed production and put some workers on unpaid leave due to poor demand for its steel products. Sino-Environment expects to charge a mark-to-market loss of about 100 million yuan (S$22 million) for its fiscal third-quarter results. Meanwhile, investors are kept in suspense over the reported arrest of the chief and deputy chief at China Printing and Dyeing who went missing early this month.

As investors wonder if there could be more bad news from S-share companies, the Singapore Exchange (SGX) is likely to get flak for its liberal policy towards attracting Chinese listings. Since SGX's move towards a disclosure-based regime in 2002, it has flung its doors wider to foreign listings. In particular, it tried to crack the Chinese market. Chinese companies have since made a beeline to SGX, making up half of its foreign listings.

While the growth in numbers is obvious, the issue of quality is murkier. The scepticism over the quality of Chinese listings has not been without reason, as previous corporate scandals have tossed credibility issues into public focus.

Let's face it. Bigger Chinese state-owned enterprises are streaming in droves to the Shanghai and Hong Kong stock exchanges and this leaves a pool of smaller Chinese companies that would make SGX their choice destination for listing. This has already led some observers to say that investing in Chinese listings on the Hong Kong stock exchange is safer than those on SGX.

Surely, this statement may stir some angst among S-share companies here and even at SGX. It certainly is unfair to the many gems among the Chinese listings here as investors mix the good with the bad.

The low valuation suffered by S-shares is the result of the high-risk premiums investors attached to them. They are usually among the first to be ditched in market sell-offs. But can we shun Chinese listings and turn off the funding tap? Probably not. We have probably come to a point where it is difficult to wean off this crucial source of foreign initial public offerings (IPOs). Chinese listings add liquidity to the Singapore bourse and to a large degree, raise its standing as an Asian gateway. Reflecting strong interest, S-shares have been trading at twice the velocity of other SGX-listed stocks.

There have been as many Chinese IPOs as local IPOs year-to-date. SGX cannot depend solely on homegrown enterprises to make up the IPO numbers, and there is a ready pool of fast-growing Chinese enterprises seeking listing either in their own home market or overseas bourses. It is not a good idea to turn off the funding tap if there is money to be made, but how do we ensure that we only attract the best to list here?

Tighter regulation may be needed. But that remains a sticking point for Chinese companies, whose operations are mostly in China. The missing act of the husband and wife team at China Printing and Dyeing, whose parent company might have bankrupted, has again highlighted the difficulty of going after errant management that is based offshore.

S-share companies that are not incorporated in Singapore also do not need to comply with the Companies Act. While they are expected to meet the Securities and Futures Act and SGX listing requirements, the enforcement has not been undisputed too.

Take the case of China Energy, which failed to account for the unauthorised use of IPO proceeds for an additional payment in an acquisition. The company has not been penalised for not meeting certain conditions set out in the IPO prospectus for the acquisition to go through.

SGX's relative silence in such cases has raised concerns over a perceived reluctance to hit out hard at Chinese companies. It would be crucial to remove such perception to set the record straight for the existing and prospective Chinese listings.

Perhaps, one beneficial outcome that may result from this financial shake-up for S-share companies is that the good ones are distinguished from the bad, and there may now be a stronger cause for SGX to review its policy towards Chinese listings.