In 2020, China dominated the global IPO market as never before. 565 new public companies were born through listings on China’s domestic markets, Hong Kong, and the U.S. exchanges, raking in $133 billion dollars. That is up by 51% from 2019 and compares to $78.2 billion raised by 218 operating companies on the U.S. markets during the same period. While the U.S. still led the world in capital raising last year, that was primarily due to the unprecedented 248 SPAC IPOs that raised $75.5 billion dollars. In 2021, SPAC IPOs based in Asia are taking off as experienced private equity, venture, and hedge fund investors launch their own SPAC initiatives. A SPAC merger creates yet another option for the management teams of companies from Greater China to consider in order to raise capital and obtain public status on an accelerated timeframe.
The U.S. IPO market is off to a rollicking start in 2021, with 114 new listings in the month of January that have raised $36.1 billion. The top performer so far? RLX Technology, the Chinese e-cigarette purveyor that rocketed 146% on the first day's trading, is currently hovering at twice its offering price.
On December 2nd, 2020, the House of Representatives unanimously approved a bill that would bar Chinese companies from trading in the U.S. if their auditors are not subject to inspections by the PCAOB within three years. The "Holding Foreign Companies Accountable Act" was passed by the Senate in May and will now be sent to President Trump to be signed into law.
Despite a directive from a White House working group that could lead the SEC to close the door to companies whose auditors are not PCAOB-inspected, Chinese companies continued to raise significant amounts of capital on U.S. exchanges in the third quarter of 2020.
For years I have heard a familiar refrain from American investors: They would love to be able to participate in China’s economic growth, if only they could trust the accuracy of the accounting. Unfortunately, episodic blowups of listed Chinese companies have sown doubts about the reliability of their financial reporting and governance practices. In cases when serious problems emerged, there was limited recourse available to hold management accountable or secure compensation.
On May 20th, the U.S. Senate passed legislation to force Chinese issuers to comply with inspections by the Public Accounting Oversight Board (PCAOB) and to certify that they are not owned or controlled by the Chinese government.
As a new “silicon curtain” crashes down between the technological infrastructure of America and some of its allies and China and the countries in its sphere of influence, there has begun to be talk about restricting flows of capital as well as goods between the two nations. Some have fretted that China might dump its holdings of US treasuries in retaliation for escalating tariffs. Other analysts have speculated that U.S. financial institutions might soon be prohibited from investing in securities in mainland China’s state-owned enterprises. And now Senator Marco Rubio has put the nuclear option on the table with a bill and editorial in the Wall Street Journal, “You Can’t Trust a Chinese Audit,” proposing to potentially boot hundreds of Chinese companies off of U.S. stock markets.
Fraser Howie is one of the most astute observers of China’s banking and financial systems, and his book Red Capitalism: The Fragile Foundations of China’s Extraordinary Rise is required reading for anyone who wants to understand China’s transformation from an impoverished backwater into a powerhouse of authoritarian capitalism. Fraser has spent over two decades trading, analyzing, and writing about Asian stock markets and has worked for companies including Bankers Trust, Morgan Stanley, CICC, and CLSA. He is a regular commentator on Asian financial markets and monetary policy for international print and television outlets.
MarcumBP’s Drew Bernstein caught up with Fraser recently to understand his views on how the economic and business environment is changing and the challenges that Chinese policymakers face.
I thought it would be useful to share key takeaways from the recent Bloomberg Invest Asia conference, an invitation only event for international business leaders to exchange ideas regarding China’s role in the investment community.
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.