SINA Corp (NASDAQ:SINA), a Chinese technology firm, has recently announced its plans to launch a $500 million dollar IPO. The company looks set to choose New York over Hong Kong and Shanghai, however, joining a recent flood of Chinese companies choosing to launch their IPOs abroad.
We’ve all heard the narrative, China is quickly emerging as the world’s next super power and there is little the United States can do except perhaps slow down the inevitable. Fair enough given that China has over a billion citizens and trillions of dollars in funds. Yet if China is the world’s next super power, why are so many Chinese companies choosing to launch IPOs in the United States?
It is believed that as many as 30 Chinese companies could end up launching IPOs in the United States this year. Chinese heavyweights, such as Alibaba, are carefully considering launching in America. While China has emerged as one of the world’s leading manufacturing economies, and Hong Kong is one of Asia’s premier financing centers, many Chinese firms still prefer Wall Street to the Middle Kingdom.
China’s economy suffers from accounting standards
China’s accounting standards are notoriously ineffective. In fact, many Chinese companies have been delisted from foreign exchanges in recent years due to accounting irregularities. While some corrupt companies may benefit from lax standards, companies serious about conducting clean business and competing in international markets suffer.
Simply put, Western investors have plenty of cash to invest, and many are interested in investing in Chinese companies. These Western investors are also concerned about the security of their cash. Numerous Western companies, such as CAT, have found themselves suffering massive loses after acquiring Chinese companies only to realize that the financial information provided during negotiations was bogus.
Investors must deal with the same fears when investing in companies. In order to analyze a company’s potential and value, having access to detailed and accurate financial statements is essential. With reporting standards so lax in China, many investors simply refuse to invest significant amounts of money in local firms.
By listing on an American exchange, however, and meeting the higher reporting requirements, Chinese companies increase their chances of gaining access to Western investments. This, in turn, can help companies raise the funds and resources necessary to fuel expansions, research, and acquisitions.
Hong Kong’s listing requirements too stringent for Chinese companies
So why don’t Chinese companies turn to Hong Kong, another global financial hub on par with London and New York? After all, Hong Kong likewise has more stringent reporting standards and is already successfully in attracting foreign investments. Many major financial firms and investors even have regional offices in Hong Kong.
Ironically, Hong Kong suffers from the opposite problem of China: listing requirements are unattractive for many companies. Specifically, Hong Kong places investors’ rights first and foremost, especially in regards to corporate governance. While in many ways, this position is a good one, it does create a situation in which the founders of companies are unable to protect themselves from hostile investors.
Specifically, Alibaba’s leaders want say in who can be elected to the board of directors. Hong Kong’s laws on the other hand, treat all investors equally, and thus founders can have no more say than other investors.
The lack of ability to protect founders and their rights has been one of the key forces driving Alibaba towards the United States. Alibaba and its founder Jack Ma have made it clear that they would prefer to list in Hong Kong, however, Hong Kong’s restrictions against allowing founders more say in choosing the composition of the board of directors is pushing Alibaba abroad.
United States the biggest winner
While the U.S. may be having trouble competing with China in terms of manufacturing and other low value areas, it still maintains an edge in higher value areas of the economy. Remaining the world’s premier financing center will help the United States maintain this lead. Of course, China and Hong Kong’s government will most likely look to reform to help make local financial centers more competitive.