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Investor scepticism about Chinese companies listed in the US has left this funding channel almost closed for new equity issuers from the mainland. Such companies will only regain their welcome if they submit to much higher levels of transparency and the securities regulators in the US and China become more cooperative.
Chinese companies have had enough of the chagrin of US investors.
Last month the formerly Nasdaq-listed Focus Media, one of China's largest out-of-home digital advertising firms, attracted US$1.525 billion from global underwriters to help finance a US$3.7 billion privatisation by a consortium led by private equity firm Carlyle Group in December.
Focus Media's desire to go private is hardly unique. In fact it is set to become the 47th US-listed Chinese company, or listco, to de-list over the past two years.
The steady flow of listco privatisations stems in part from lingering investor concerns about the companies, almost two years after equity short-seller Muddy Waters Research accused Chinese forestry company Sino-Forest of lying about its timber.
While Sino-Forest firmly rejected Muddy Waters' specific allegations it was evidently in a precarious financial situation, because it filed for bankruptcy protection in nine months later, in March 2012. Other claims of fraudulent behaviour among Chinese listcos followed, impacting sentiment about many of these firms, and leading the Securities and Exchange Commission (SEC), the US securities regulator, to begin investigating some of the listcos and their auditors.
The SEC has deregistered the securities of nearly 50 Chinese companies and filed fraud cases involving more than 40 issuers and executives. In December it extended its hunt to global auditing agencies, deciding to investigate the Chinese branches of global auditing firms that do not submit documents on listcos.
The SEC's investigations and demands have put Chinese companies and auditors in a tough spot, because under Chinese law local corporates are not allowed to supply some types of information to outside authorities. To avoid falling afoul of China's regulators the listcos have therefore been reluctant to be overly forthcoming with information, but suspicious international observers have easily been able to construe this as a sign that the companies have something to hide.
The mixture of scandal, SEC investigations and the difficulty of listcos to meet US information disclosure demands has...