Where Have All The Chinese IPOs Gone?

NEW YORK (Reuters) – This may be the year that modern China comes of age thanks to the Olympics, but you wouldn't know it in the U.S. IPO market.

After a record number of Chinese companies sold shares through initial public offerings in the United States in 2007, Chinese IPOs have ground to a near halt here.

There are two Chinese offerings planned for the coming week, but even if they both reach the market — always a question in today's turbulent markets — it will only bring the number of Chinese offerings to four so far this year.

Last year, a record 31 Chinese companies raised $6.8 billion, according to Thomson Reuters data, led by some blockbuster deals, including the billion-dollar offering by Giant Interactive Group Inc (GA.N: Quote, Profile, Research, Stock Buzz), an online game developer; and the debuts of LDK Solar Co Ltd (LDK.N: Quote, Profile, Research, Stock Buzz), a renewable energy company, and China Nepstar Chain Drugstore Ltd (NPD.N: Quote, Profile, Research, Stock Buzz), which raised $486 million and $384 million, respectively.

While the bear market conditions in the United States this year are clearly one reason for the slowdown, there is also growing concern the United States has lost its cachet for Chinese companies, which now have many alternatives in Asia and Europe.

“An ongoing trend in the past two years has seen companies forum shop for their IPOs, so the U.S. is no longer the natural default choice,” said Colin Diamond, an attorney specializing in IPOs for the New York law firm White & Case.

One reason often cited is the tough conditions for listing in the U.S. market following the introduction of the Sarbanes- Oxley corporate governance law in 2002.

The law, introduced following the Enron and WorldCom corporate collapses and their accompanying scandals, means that companies wishing to list and remain listed have to spend a lot of time and money making sure their accounting controls are in good shape.

“Whether it is a market close to home or a European market, we are seeing more heated competition for every Chinese listing,” said Robert McCooey, Nasdaq OMX's senior vice president of new listings.

The Nasdaq currently lists 54 companies from greater China.

Nasdaq OMX Group Inc (NDAQ.O: Quote, Profile, Research, Stock Buzz) and NYSE Euronext (NYX.N: Quote, Profile, Research, Stock Buzz), which operate the two leading U.S. stock exchanges, know they are not alone. The London Stock Exchange (LSE.L: Quote, Profile, Research, Stock Buzz) among others, along with Chinese exchanges seeking to keep listings at home, are all vying for the IPOs.

A 2006 Chinese law may have limited IPOs abroad by making it more difficult to create the “special purpose vehicles” that Chinese companies need to list offshore, said one Beijing-based U.S. corporate lawyer. Most of the recent IPOs have been carried out by companies that had SPVs before the law was passed.


Mind you, the slowdown is not only an American issue. One of the reasons for the fall-off may be concern among investors in the United States and elsewhere about the Chinese economy and whether or not it hits a wall after the Olympics.

Michael Yang, who is the New York Stock Exchange's representative in Beijing, said those concerns are taking a toll on valuations, further contributing to the slowdown of Chinese IPOs. Last year, the New York Stock Exchange, a unit of NYSE Euronext attracted 18 Chinese IPOs, bringing its overall total to 51.

Yang said the appreciation of China's currency, the renminbi, is not helping, by curbing Chinese exports, and affecting profitability and investor interest.

And China's own stock markets have taken a bath in the past year. Shanghai's benchmark index is down 40 percent over the last six months, while Shenzhen's is down 42 percent, the world's two worst performers over the period.

The Chinese IPO rush might also have been slowed because nervous U.S. investors are holding them to a higher standard, some analysts say.

“Some Chinese deals haven't done so well in after-trading, so some investors prefer to wait to see how the shares perform before buying them,” said Joseph Meuse, an advisor with Belmont Partner.

Returns have been as high as the 700 percent increase since the debut of China Life Insurance Co Ltd (601628.SS: Quote, Profile, Research, Stock Buzz) in 2003, the largest Chinese IPO ever at $3.5 billion. But at the other end of the spectrum, the next largest IPO, Semiconductor Manufacturing International Corp (0981.HK: Quote, Profile, Research, Stock Buzz), has fallen 84 percent since its $1.8 billion offering in 2004.

During tough times, Meuse said, U.S. investors become less adventurous and less willing to take a chance on companies halfway around the world.

The belief is 'I'm only going to hold what I know' and there's a flight to safety, he said.

The return of Chinese IPOs to American shores will hinge on how the coming round of Chinese IPOs do.

In addition to the China Distance Education Holdings Ltd and China Mass Media International Advertising Corp debuts planned for the week, GCL Silicon Technology Holding Inc — a manufacturer of polysilicon and wafers for the solar industry — filed last week for an $863 million IPO at a date yet to be determined, according to Dealogic. All three plan to list on NYSE.

“Those three IPOs' performance will be important to help bring investors back,” Yang said.

There are signs the market is opening up again. Nasdaq OMX's McCooey said 12 such deals are in the pipeline, mostly for alternative energy, technology and biotech companies, while the NYSE's Yang sees a number of solar energy, media and education companies on the horizon.

But in the meantime, Meuse said: “Chinese IPO's are in a holding pattern.”

By Phil Wahba
 (Editing by Andre Grenon and Maureen Bavdek)