Overcoming the S-chip aversion

PHOTO: Overcoming the S-chip aversion

China initial public offerings (IPOs) are back in vogue.

In Hong Kong, the IPO of mainland "bad" bank Cinda was so hot that in just days, it whipped up over US$10 billion (S$12.5 billion) in demand from blue-blooded investors such as American fund Oaktree and sovereign wealth fund Abu Dhabi Investment Authority.

Cinda was one of four so-called bad banks set up in 1999 to take on bad loans from China's large state lenders.

So far, little of the exuberance in Hong Kong has trickled down here.

Except for a few mainland-listed firms such as China Environment, there is little interest in the 140 S-chips listed here, given the various scandals that have plagued the sector in recent years.

But there are hopes that interest may be revived with the Singapore Exchange's (SGX) move to collaborate with Chinese regulators to vet potential China listings here. This will establish a framework, similar to what is now in place for H-shares in Hong Kong, to give mainland firms a straightforward route to listing here.

Will local investors bite?

Certainly, having the China Securities Regulatory Commission (CSRC) - the Chinese regulator in question - vet IPO hopefuls will offer an additional layer of protection on whether they represent a safe investment or not.

Few of the 140 S-chips had any dealings with the CSRC when they made a beeline to list on the local bourse. All they did was swap their assets into a shell company incorporated in a tax haven such as Bermuda or the Cayman Islands and list that holding company in Singapore.

So when the various S-chip accounting scandals erupted here a few years ago, it was not surprising to find the mainland authorities taking a stand-offish attitude. After all, they had not been consulted on whether such firms made viable investments or not.

For investors, that lack of scrutiny was costly. Relying on an army of professionals - the investment bank sponsor, lawyers and accountants - to scrutinise a mainland IPO and paying them a king's ransom had turned out to be an insufficient safeguard.

Worse, errant S-chip bosses can get away scot-free with giving fake information or misappropriating assets as there is no extradition treaty between China and Singapore to bring wrongdoers to justice.

What CSRC offers to review is a checklist which includes areas such as whether a company has paid its taxes and holds the proper legal titles to its land assets.

Now that may seem like standard procedure for any IPO listing process. But there have been instances of overseas-listed Chinese companies which have defrauded investors with fake land titles, so the CSRC is staking its own reputation to make sure everything is in order before Chinese companies can proceed with overseas listing plans.

The CSRC is also bolstering investors' confidence by drafting tough rules to curb misconduct that include stiff penalties for investment banks giving inaccurate information in a prospectus or making poor risk disclosures.

While those rules are aimed at the domestic China market, it will ensure that the professionals maintain the same high level of vigilance in working on foreign IPOs.

On the flip side, the collaborative efforts between the SGX and the CSRC could be seen in the wider context of China overhauling its outdated IPO screening process to allow more of its private sector companies to tap the financial markets for funds.

For a long time, mainland firms have been caught in a massive logjam to list in Shanghai because they are subject to years of review by the CSRC. Since last October, the problem has become even more acute, following a freeze on IPOs altogether in China.

But the CSRC is taking a market-oriented approach based on a list of pre-determined criteria to screen IPO hopefuls, as it moves to restart the China IPO market.

This means that in future, a mainland company may find itself with the same checklist to surmount, whether it wants to get the green light from the CSRC to list on the SGX or in Shanghai.

Given the allure of Shanghai, it may well stay put in China, rather than turn to the SGX to get a listing here.

As such, the heyday of 2005 and 2006 when the SGX was able to attract scores of Chinese firms each year to list here may well be over, even if local investors can be persuaded to overcome their aversion towards S-chips.


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