On Monday China burned the rulebook that has guided its IPO market up till now. The result, unsurprisingly, was fireworks.
Judging from the headlines, you might think Chinese technology companies are on the ropes. The Justice Department has been investigating and indicting telecom giants Huawei and ZTE. Rising U.S. tariffs threaten to displace China’s dominance in the global supply chain for electronics. And Chinese internet Goliaths Alibaba Group (NYSE:BABA) and Tencent saw their market values shaved in 2018 by investor jitters over government policies and a softening economy.
If you only read the newspaper or watched TV, one might think that the economic relationship between China and America was on the verge of an irreparable split. But as I shared in a recent interview on Bloomberg television, I actually remain fairly optimistic that, despite the many bumps in the road, the world’s two biggest economies will continue to find ways to work together and that deals will get done.
The role of a Chief Financial Officer for a Chinese company listed on the U.S. stock market is intensely challenging. While the job of CFO generally has become increasingly complex due to the growth in regulatory oversight and the pressure from institutional shareholders, Chinese CFOs need to also bridge two very different business and legal cultures.
Tencent Music’s (NYSE:TME) $1.1 billion IPO on the NYSE last week put a shiny bow on a banner year for Chinese IPOs on U.S. stock markets, with over $8 billion raised year-to-date, twice the IPO haul for Chinese companies in 2017. With 30 Chinese companies having listed on NASDAQ or NYSE it’s the best year since 2014, when Alibaba’s (NYSE:BABA) $25 billion IPO broke all previous records. What’s more, there is a sizable pipeline of China “unicorns” with multi-billion dollar private valuations hoping to score listings in the near future.
Given the deteriorating trade relations between China and the U.S., why are so many of China’s most innovative and valuable private companies still seeking to ring the opening bell in New York? And can this blistering pace of new IPOs be sustained?
"If the trade war continues to escalate as Trump has threatened, there's going to be a big impact on the capital markets... I expect that we're going to see a winter in IPOs next year."
Paul, you've gotten to this point where you've become this guru for all issues related to accounting in China. How did that journey come about?
I came to China 21 years ago. I was transferred here by the international accounting firm PriceWaterhouseCoopers. It was Price Waterhouse at the time. I was in China with them for seven years. Then I took early retirement from PwC and I tried playing golf for a while, but got bored with that. So I went back to school. I first studied theology. I enjoyed the academic side of it, so I decided to get a PhD in accounting. I chose, as my topic for my dissertation, the development of the accounting profession in China.
One of the things that I discovered in my research was that there were gaps in the regulation of Chinese companies that were starting to rush to U.S. stock exchanges in the early 2000s. Those gaps in regulation were likely to lead to an environment where there might be a lot of fraud. I predicted it would happen in my doctoral dissertation. About the time I finished it, it all came true. There were over 100 cases of fraud brought against overseas-listed Chinese companies. My work came to the attention of the Public Company Accounting Oversight Board (PCAOB), which asked me to serve on their standing advisory group. And also a lot of hedge funds and other market participants got interested in what I had to say.
My blog, The China Accounting Blog, got quite a bit of attention. After a while, basically, everybody who was following the China stock market was reading what I was writing. That has led to me being, probably, the leading Western expert in Chinese accounting and auditing problems for overseas -listed Chinese companies.
2018 has been a banner year for Chinese IPOs thus far, with 23 Chinese companies going public on the U.S. stock markets in the first nine months. In the technology sector, Chinese innovators are outpacing American companies in the race to the opening bell. And there is a gathering herd of Chinese “unicorns” with multi-billion dollar valuations and strong backing from large private equity funds waiting for their turn to tap the public markets.