Listing awareness shows way forward

THE memorandum of understanding between the China Securities Regulatory Commission and the US Securities and Exchange Commission is a welcome development.

It poses no threat to Hong Kong's status as a key recipient of China listings.

A wide exposure to regulatory regimes across the globe, including North America, Europe and Australasia, can only enhance the mainland regulator's ability to understand some of the complex issues and myriad interests involved when trying to solve problems of securities regulation.

Hong Kong exchange chief executive Paul Chow Man-yui said earlier in the year that such a development was positive.

He argued that the chance of another regulatory regime outside our time zone taking over as the primary listing vehicle for mainland overseas listings was negligible.

In any case, Beijing would not allow it. And overseas international institutions like to see healthy domestic investor support and liquidity before deciding to dip their own toes in overseas tranches.

A number of companies will obviously find primary listings in New York and London, by-passing Hong Kong on the way. But these will probably be a minority.

Problems with accounting and attaining quality audited numbers on these companies, as shown by the experience of the territory's H share companies, will dampen any desire on the part of the mainland to pursue primary listings in London and New york, where the regulatory demands are also more stringent.

What we are likely to see is the development of a fully fledged and highly liquid American depositary receipt (ADR) type of trading market in mainland equities overseas.

There could also be dual listings of these companies, where Hong Kong and other stock exchanges might figure in mainland enterprise listing plans.

There is a place for Shanghai, Shenzhen and Hong Kong, and on the international stage, London and New York.

Each can accommodate a variety of needs. The mainland exchanges offer enterprises direct exposure to the price market mechanism, in a marketplace where they have an alternative source of capital-raising domestically.

This offers certain domestic investors an alternative investment vehicle to those now on offer in China.

As the regulatory regimes in Shanghai and Shenzhen develop, issues linked to disclosure, corporate governance and the redefinition of traditional mainland enterprise capital structures will also develop.

Hong Kong offers a staging post for mainland enterprises which are capable of conforming to stricter rules demanding higher levels of disclosure, more rigorous accounting treatment and higher standards of corporate governance.

For mainland enterprises, there is a prestige value to such a position.

This, however, can fast become a major scar on the face of a group's image of itself should there be a serious blow-up or a dispute over, for instance, accounting standards, share trading or connected transactions of the proper distribution of shares in placements.

Such disputes threaten to ruin the reputation and credibility of such enterprises, the managements of which are not used to the levels of accountability taken as read in Hong Kong.

For the local and international investor, Hong Kong H shares offer another avenue of exposure to China.

Enterprises aiming for the heady heights of a New York or London listing will need to satisfy the best accounting disclosure standards in the world.

Given Hong Kong's experience of H share companies' accounting and disclosure practices, this is likely to require a mammoth effort on the part of the companies involved.

Major international listings of mainland enterprises could be a little way off, although there are intermediate steps through the sponsored ADR route.

Successful listings would place these groups at the centre of global capital markets and as such they would be a major public relations coup for China and the companies themselves.

For the international investor, there will be a group which has ostensibly met some of the best regulatory standards in the world, and investing in their shares through domestic exchanges will offer a degree of protection that is amiss when investing overseas in Hong Kong, or in B shares.

These institutions will still take some convincing, however, in the form of strong local investor support, either in China or Hong Kong.