Money

Reverse-merger fallout to hurdle Chinese listings

By Li Xiang (China Daily)
Updated: 2011-06-24 13:17

BEIJING - The pace of Chinese listings in the US markets is likely to slow this year amid tougher regulations aimed at curbing backdoor listings of companies, following a series of alleged accounting scandals, analysts said on Thursday.

The US Securities and Exchange Commission (SEC) said on Wednesday that it is considering several options to address its concerns about the reverse-merger companies, which merge with a public shell company in order to gain access to the US capital market. But it did not provide details of what measures it might adopt.

"The pace of new listings from China is highly likely to decelerate after the listing frenzy in the past two years," said Gui Haoming, chief strategist at Shenyin & Wanguo Securities.

"The US regulator is set to raise the bar for reverse mergers, which means that it's going to be more difficult for companies to use the typical shortcut to list on the US market," he said.

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There has been a strong momentum in Chinese listings in the US over the past several years, and many of these companies went public through reverse mergers, which enable them to avoid scrutiny and regulations associated with the traditional listing method of initial public offerings (IPO).

However, investors and regulators in the US are increasingly concerned about listed companies from China after some of them were charged with fraud and accounting mismanagement.

Since March, five Chinese companies have been forced to delist and 15 have suspended trading amid widespread allegations of fraud. According to the SEC, there have been 600 backdoor registrations, with more than 150 from Chinese companies since January 2007.

Yang Ge, the chief representative at NYSE Euronext's office in Beijing, said that stricter regulations by the SEC will also raise the IPO cost for Chinese companies, because they will have to hire more professional and credible agencies as auditors and underwriters.

"The US regulatory authority will require higher transparency and stricter standards for new listing applications," he said.

Analysts warned that the US-listed Chinese companies will be faced with the risks of a further plunge in their share prices if they do not take action to contain the ballooning credibility crisis.

Share prices of reverse-merger companies from China have slumped by 44 percent, according to data from Bloomberg.

"Although the US regulator is targeting the so-called reverse-merger companies, the exposure of the recent accounting scandals will hurt the US-listed Chinese companies collectively, because they are faced with an unprecedented credibility crisis," Gui said.

Duncan Niederauer, chief executive officer of NYSE Euronext, said in May that the fraudulent activities of some Chinese companies may have a negative impact on the overall level of issuance in the US market.

But analysts said that the US will remain an attractive capital market for Chinese companies despite the tougher regulatory environment.

"Given its strong capital base, the US is still an attractive market globally. And its listing procedures are still relatively convenient compared with other markets," Gui said.