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An Insider’s View on China’s IPOs

Volume 4, 2014

By Charmaine N Clarke

As Managing Director of Eastern Harbour (Shenzhen) Investment Management Company, Dan Bin (EMBA 2007) has kept a watchful eye on China’s IPOs over the years. A frequent blogger and columnist, he’s not shy about sharing his views. TheLINK sought him out for a one-one-one interview in early July.

TheLINK: What are the chances of a Chinese firm having a successful IPO? Are there any factors related to the peculiarities of the Chinese market and economy that increase or decrease the likelihood?

Dan Bin: Right now, there aren’t a lot of listed Chinese companies.  So a Chinese company’s stock price is bound to soar after it goes public.  In addition, companies are usually valued extremely highly, which is another advantage. But the problem is that too many companies are waiting for the government’s approval to list. 

TheLINK: There have been concerns raised, over the years, that some Chinese stocks are not properly priced or companies are not transparent enough and this has made some investors wary of buying them. Is there cause for concern? 

At present, Chinese stocks are simply priced based on the industry standards without taking into account different companies’ specific circumstances.  Looking at Chinese concept stock on the American market may shed some light on this issue.  Small stocks may have some problems when it comes to transparency.  But Chinese listed companies, especially the blue chip companies, are rather transparent and conform to the regulations. 

TheLINK: Alibaba’s much anticipated IPO is expected to be the biggest in tech history. How do you think it will be received, and how will the stock perform after listing?

Alibaba’s stock will be highly sought-after by investors once it’s listed.  However, Alibaba (1668) abandoned its original plan to list in Hong Kong, resulting in a great deal of loss to investors who bought its stocks at a high price.  Furthermore, the transferring of Alipay to Jack Ma from Alibaba has caused many people to have misgivings about the company’s management structure. So there’s a big challenge for Alibaba to dispel investors’ misgivings about the company and this challenge will plague it for a long time even after its listing.

Cover Story, Volume 4, 2014

TheLINK: Last December, the China Securities Regulatory Commission (CSRC) said that by the end of this year it intends to scrap its approval-based IPO system where it decides which firms are allowed to list and when. This would make the CSRC’s method more similar to a registration-based scheme like the approach used by the US and other developed markets. What’s your opinion on the suggested change?

I’m convinced that the problems of China’s stock market are caused by the low level of marketisation.  China insists on developing its stock market with its own characteristics rather than adopting its approach based on the experiences of mature markets in foreign countries. This has caused a lot of problems that are difficult to solve.  So I’m in favour of the registration-based scheme.  On one hand, we need a correct and fair assessment of an entrepreneur’s increased wealth when his or her company goes public.  On the other hand, we should learn from western countries how to get tough on companies that forge documents for listing.  The Chinese government isn’t tough enough on securities crimes.  Compared with the benefits these criminals get, the light punishment is not a deterrent and in fact may encourage them to commit forgery. China should change its laws and regulations to make those who falsify documents used in IPOs pay dearly for their actions.

TheLINK: China’s IPO market resumed activity in June this year after being dormant since last February.  The CSRC says it plans about 100 IPOs this year, which would be about 150 for China in total. Is this a realistic target? Why, or why not?

China’s domestic investors are not mature and they like to chase newly listed companies.  Because there aren’t many listed companies in the market, a newly listed company’s stock price is sure to stagnate; so 100 to 150 companies going public will not affect the overall market landscape.  I believe that a registration system will change investors’ current approach of blindly chasing stocks of newly listed companies.

TheLINK: In addition to the suggested registration-based scheme, what are the overall regulatory changes needed to ensure that China has a healthy IPO market?

If there are no delisting mechanisms, if there aren’t tougher laws and regulations under a registration-based scheme, this will lead to horrible problems.  Changes to the current system should be completed as soon as possible while adhering to market rules.