It has been a trying few months for some prominent entrepreneurs in China. The arrest of cosmetics mogul Liu Xiao Qing, for alleged tax evasion, was followed by the investigation into Yang Rong, founder and former chief executive of Brilliance China Auto Holdings for alleged economic crimes and tax evasion.
Yang Bin, chairman of Euro-Asia Agricultural (Holdings) reportedly remains under house arrest in Shenyang for alleged tax evasion and other economic irregularities. Euro-Asia, meanwhile, remains deeply troubled: it is under investigation by the Securities and Futures Commission in Hong Kong (SFC) for possible breach of disclosure rules, whilst the China Securities Regulatory Commission (CSRC) has reportedly passed on information to the SFC relating to allegations of accounting fraud.
As outside observers, we do not have all the facts as to the specific cases. However, recent events surrounding Euro-Asia have raised important issues relating to whether the current regulatory and corporate governance regimes in Hong Kong are equipped to deal with the specific issues raised by the P-chips.
What sets P-chips apart from other Hong Kong listed China companies is that they are privately controlled (the 'P' stands for 'private'). Most Hong Kong listed 'H' share companies are state-owned or controlled (SOEs).
This was one reason the P-chips sector enjoyed such a wave of initial popularity, as investors felt that private companies were likely to be more dynamic, more nimble, and bottom-line driven.
Secondly, many P-chips are closely associated with a single majority shareholder, often (as in the case of Yang Bin) also occupying the main executive role, creating an often hazy separation between ownership and management. This is the case with many other Hong Kong listed companies.
Also, Yang Bin, no doubt like many of the mainland-based entrepreneurs behind P-chips, had to make a difficult and rapid transition from running a private group operating in the more opaque legal environment in China to being subject to the obligations of a publicly listed company in Hong Kong.
