FUNDS RAISED THROUGH initial public offerings in Hong Kong are headed towards a record high of $200billion this year as more and more mainland companies look for capital. According to accounting firm PricewaterhouseCoopers (PwC), many of these are smaller domestic and privately owned mainland companies, or Taiwanese-invested enterprises operating in China. One of the reasons for the increasing amount of funds raised on the Hong Kong stock exchange is a reluctance on the part of mainland companies to undergo the stringent and ongoing compliance requirements that the Sarbanes-Oxley Act requires to list in the United States. 'It isn't because they are not capable of reaching the standard, they are considering the cost versus the benefit of compliance,' said Ernest Ip, partner and assurance leader for Hong Kong and China at PricewaterhouseCoopers. 'For a company choosing to list in the US, the costs are all related to compliance but the benefits are that the company is listed in a prestigious financial market and gains exposure, a wider shareholder base and investors to participate as shareholders,' he said. 'But having said all that, the Hong Kong market attracts the same shareholders as the US market. It thus becomes a question of what the listing status in the US means to an individual company. In the past it was nice to have this status, but it has now become very costly and compliance is an ongoing cost. 'Mainland companies are taking the decision about where to list very seriously.' China's biggest state-owned enterprises (SOEs) have been staging IPOs in Hong Kong for more than a decade. The first H-share to list on the local stock exchange was Qingdao Brewery in 1993. 'At that time it was a test as to whether these companies would be major players in the Hong Kong stock market. Based on the daily trading turnover and the index component in the exchange, it is very clear that we did the right thing in bringing them to Hong Kong,' Mr Ip said. 'They are substantial contributors to the success of the territory as an international financial market.' The first SOEs to list needed a lot of help to meet the standards. In company law and accounting standards, for example, they lacked maturity and wanted education and support to try to bring them up to speed in international requirements. PwC and other firms had to make sure that all their financial statements were prepared according to the accounting standards that were acceptable for international capital raising. Subsequently, the authorities in China have moved quickly to close the gap. They have their own company law in place and the China Accounting Standards will converge with the International Financial Reporting Standards on January 1. 'This is a very big move for them to converge with the international requirements. We see a lot of good accountants now in China. They have less international exposure but given time they will get there, and the state authorities including the Ministry of Finance are determined that this is the right direction to take to create high- standard accounting and legal systems that will underpin foreign investment and overseas listings.' The major objective in listing overseas, other than to raise capital and expand the business, was to initiate much-needed reform to increase the SOEs' risk management awareness, improve their management reporting systems and introduce transparency and corporate governance. This objective remains paramount today. The mainland government is determined to reform its banking industry. Its four largest state-owned banks - Bank of China, China Construction Bank, Agricultural Bank of China and Industrial and Commercial Bank of China - together account for 57 per cent of all lending. Overseas listings are driving the reform of their governance and risk management systems in preparation for the opening up of China's financial markets to external competition. Mr Ip said reform through overseas listing was the right direction for the banks to take and it was driving a visible change in mindsets. For example, earlier SOEs undertaking a listing overseas would appoint non-executive directors just before the IPO, which meant that it was done purely for compliance purposes. But now, even if the IPO was 12 months away, the SOEs already had independent non-executive directors appointed, sitting on the board and giving advice to them. 'The mindset has changed in that the independent non-executive directors play an important part in the corporate governance and enhancing of the banks' internal control systems. 'They are aware that they have to do it now rather than later, which is a good thing and is a reflection of the growing awareness of these SOE banks,' Mr Ip said. The banks have also been keen to engage international consultants to assess their risk management systems, show them how to better monitor the loan books and put comprehensive credit assessment systems in place, all positive indicators of substantial investment in advance of undertaking an IPO. Not surprisingly, this growing awareness and reform in the banking sector is also filtering down to companies in other industries such as insurance. PwC provides IPO services to four major industry groups: consumer and industrial products; technology, info-comms and entertainment; real estate, energy, transport, engineering; and financial services. 'We focus on the mega-size IPOs and companies in these four industry groups, and are targeting all the major players in China who want to undertake a capital raising,' Mr Ip said. For the past 12 months the financial services sector in particular has been outstanding because of the large companies that have listed. But real estate is also performing well in volume of transactions. He said that the launch of reits in Hong Kong triggered many other real estate initiatives and had tempted mainland companies to come to Hong Kong and raise capital.