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SCMP Reporter

CHINA is in a dilemma over proposed secondary listings by foreign companies on its exchanges.

  Although China welcomes the companies in principle, the legal and regulatory frameworks that would make such listings possible have yet to be set up.

  And the planned listings by world-famous firms such as Germany's Daimler-Benz are expected to create huge interest among mainland investors, and perhaps drain an already-limited source of funds.

  ''If we say yes to them, we should work out an applicable programme.

  ''But if we say no, we should give reasons, and acceptable ones,'' said a well-placed source in the China Securities Regulatory Commission (CSRC).

  A decision to list the companies now would increase the CSRC's workload, but blocking the listings would run contrary to China's international ambitions.

  The source said the CSRC planned to ''study the feasibility until a proposal can be worked out and the right time comes''.

  In other words, the commission will not list foreign firms on its exchanges now, but such a development is possible in the future.

  ''The reports that Daimler-Benz has been given the go-ahead by us to list in Shanghai are untrue. They haven't even filed an application with us,'' said the source.

  Given that China's securities industry is just three years old, it is a compliment that a world-class company such as Daimler-Benz and one of Hong Kong's largest banks, Bank of East Asia, want secondary listings there.

  The drawback is that a full regulatory and legal framework has yet to be established. The Securities Law, a key piece of legislation, has yet to be passed.

  David Buxbaum, of law firm Lewis, D'Amato, Brisbois, Bisgaard, Buxbaum & Choy, said China was not ready for big companies such as Daimler.

  ''The timing now is just not quite right,'' he said.

  ''There are so many things that China has to do for its own securities market, which is in its infancy.''    Investment products such as bonds, derivatives, futures and options are planned for development in China, and the CSRC plans an ambitious expansion of the cash market.

 For example, China is to issue new shares for mainlanders worth 5.5 billion yuan (about HK$4.9 billion) this year, as part of a continuing move to enlarge its stock business.

  It plans to increase the number of exchanges, to overcome capacity limits at the Shanghai and Shenzhen exchanges.

  And it is considering how to improve the liquidity of shares for the state and legal persons in listed companies.

  Tackling such concerns is likely to keep securities regulators and exchange officials busy for some time.

   Mr Buxbaum said that even the landmark Securities Law - to be published in the first half of this year - might not cover the listing of foreign firms on the mainland.

  ''The Securities Law is meant for those within China, including Sino-foreign joint ventures and wholly foreign-owned ventures operating in China, instead of those operating abroad.''   Listings by foreign firms will raise questions not yet covered by the law drafters, such as the legal status of foreign companies, the way such listings could be achieved and what impact such listings would have on China's securities market.

  One Hong Kong analyst said a foreign firm could not at present issue shares in China for mainlanders.

  Foreign companies, however, can set up joint ventures in the hope of issuing shares to mainland and foreign investors, with the ultimate aim of listing on the mainland.

  Joint-venture firms would have to meet business track record requirements and the same standards as mainland-listed firms.

  But neither Daimler-Benz nor Bank of East Asia would be able to meet these requirements, having no track record in the country.

  Despite this, Shanghai officials and the companies have suggested that the firms issue Chinese depository receipts (CDRs) - assuming the pair's listings in Shanghai are approved.

  CDRs would serve the same purpose as American depository receipts - sometimes described as global depository receipts - allowing investors in other markets to trade company paper instead of the underlying shares.

  Although CDRs are considered the most feasible way for foreign firms to seek a listing in China, there are two obstacles: the lack of convertibility of the yuan and the need for the consent of the Chinese authorities.

  Analysts suggest that a freely convertible yuan is not necessary for the issue of CDRs, which would be traded in yuan.

   But they believe regulators would be more concerned about funds draining out of the country and the high expectations that mainland investors might have about a company such as Daimler-Benz and its China operations.

  A share offer by Daimler-Benz, one of the world's most famous carmakers, would probably be devoured avidly by mainland punters, who would see investment in the stock as easy money.

  But this could mean less money for mainland firms, which need funds to restructure and expand, and for China's overall capital market.

  The German carmaker's own expectations of the China market also worries the CSRC.

 ''If they come to list, but the environment is entirely different from what they expect, what will they think?'' the CSRC source said.

  The lack of comprehensive securities rules - and poor enforcement of those already in place - has already brought complaints from foreign B shareholders.

  ''We will open the market step by step. But we need time to progress and any new issues need time for study,'' the source said.

     ''It's just like H shares, which have been worked out by sector specialists in the mainland and Hong Kong for one year before the programmes became functional,'' he said.

   China is also concerned that share offers by foreign companies may test the country's strict limits on stock listings.

  The authorities do not want share issues to run ahead of the country's overall economic development.



Foreign listings take back seat