CHINA UNIFORMLAW NET

THE CHALLENGE OF GLOBALIZATION AND CHINA’S SECURITIES EXPERIMENT (4)

III.  FOREIGN INVESTMENT IN CHINESE SECURITIES

       China’s equity markets are connected with international capital markets through two channels, one is the issuance of B shares to foreigners by Chinese companies listed in China, the other is to list Chinese companies overseas.  These two channels serve as alternative ways for China to attract foreign investment.   By the end of 1998, 106 companies had issued B shares with a total of 9.589 billion shares issued and a total of US$ 4.745 billion capital raised. [1]  As to overseas listing, by the end of 1998, 43 Chinese companies has listed shares overseas, of which 31 were in Hong Kong, 8 dual listed in New York and Hong Kong, 2 dual listed in London and Hong Kong, and one in Singapore. [2]  However, the impact of B shares and overseas listing upon China is more than capital raising.  More importantly, it represents the step-by-step opening up of domestic financial market to foreigners, which will eventually lead to profound changes.   One indication is that the Chinese government allows foreign securities firms to set up joint ventures or independently to invest in the B shares market.

        A.  Foreign Investment Shares Listed in China – B Shares

Coming into existence in 1991, the B shares markets perfectly reflect Chinese leaders’ mixed feeling toward the internationalization of securities markets, namely, making use of foreign capital without shaking socialist public ownership.  The activities of B shares are governed by mainly two regulations promulgated by the State Council and the CSRC, respectively, of which one is Regulations on the Listing of Foreign Investment Shares in China by Joint Stock Companies (hereinafter “B Shares Regulations”), the other is Implementing Rules of the Regulations on the Listing of Foreign Investment Shares in China by Joint Stock Companies (hereinafter “B Shares Implementing Rules”). As oppose to A shares, B shares present the following features:

First, B shares are denominated in Chinese currency (Renminbi), but are subscribed for, bought and sold in foreign currency, and listed and traded on securities exchanges in China. [3] Dividends and other payments by the issuing company shall be calculated and declared in Renminbi but paid in foreign currency. [4]Second, B shares can only be issued to overseas investors, which, according to the Chinese definition, shall include foreigners, persons from Taiwan, Hong Kong and Macao, and Chinese citizens that are residing abroad. [5] Chinese in the mainland of China are not allowed to buy and trade in B shares.  Third, dividends and capital gains from B shares can be sent abroad freely despite China’s comparatively strict foreign exchange control. [6] Fourth, foreign securities firm can serve as dealers of B shares while they are not allowed to step in the business of A shares. The CSRC authorized the two stock exchanges to enact stipulations about under what requirement foreign securities firms can enter into agency agreements with brokers in China or act as dealers in trading B shares. [7] In Shanghai Stock Exchange, Overseas dealers seeking to deal in B shares require a recommendation from a domestic securities dealer, paid-up capital of at least US $10 million, local business experience of at least 5 years, a good reputation, suitable premises and sufficient staff. [8]  The qualifications for foreign firms to become authorized B share dealers under the Shenzhen rules include: a relatively strong international securities business, a good professional reputation, and experience in developing international securities business. [9] Once approved, foreign operators may underwrite and co-manage issues of B shares. [10] While foreign brokers own their seats, they are not full members with voting rights. [11] The first foreign securities firm entering into Chinese securities markets is Morgan Stanley & Company, which established a joint venture entitled China International Capital Corporation with China Construction Bank and several other partners in 1995. [12]

Chinese regulators has taken many measures to boost B shares markets,[13] nonetheless the market itself is far from attractive and performs not very well.   The well – known problems in B shares markets are its lack of liquidity, restriction on foreign securities firms, lack of proper disclosure of information, and uncertainty of B shareholders rights with respect to the issuers.  Specifically, the problems are present in the following manner.  First, under the B Shares Regulations, information disclosure documents of the issuers for B shares shall be prepared in Chinese. [14] Although the law stated that a foreign language version documents can be provided when needed, it is not required. [15] This might result in the investor having inadequate disclosure because of language barriers.  Investors also lack trust in China’s accounting system.  The B Shares Regulations insincerely stipulate that the issuing company may provide financial reports adjusted according to the International Accounting Standards or the accounting standards of the place outside China where the offer is conducted, reports thus produced are still unreliable because the overall reports of the company produced according to China’s Enterprise Accounting Standards which does not inspire popular confidence so far.  In terms of shareholder’s rights, the B Shares Regulations explicitly offer the same rights to foreigners as their domestic counterparts. [16] In addition, a foreign shareholder may entrust a proxy with exercising his shareholder’s rights on his or her behalf. [17] However, this provision may not be that much meaningful because the regulations did not grant the shareholders the right to pursue derivative action.  Lack of such a provision shareholders may not have a legal basis to sue directors and officers who have violated their fiduciary duties. [18] Moreover, shareholders who intend to control a Chinese company through trading of B shares may be frustrated, because they are not allowed buy A shares which generally constitute the majority of total shares in a company.  All these serve as obstacles to bar the further development of the B shares markets.

B.  Overseas Listing 

From the listing of Qingdao beer on the Hong Kong Stock Exchange on July, 1993 to Yanzhou Coal IPO and dual listing in Hong Kong and New York in April 1998, 43 companies listed overseas, raising more US$ 10 billion. [19] Hong Kong serves as the most important capital market for mainland Chinese companies, so-called the window for China to interact with the western world, and shares listed thereon enjoys a notorious name H shares.  New York is another Chinese companies’ favorite.  In July 1993, Shanghai Petrochemical Co. listed its ADRs representing its listed shares in Hong Kong, and in 1994, another large State enterprise Shandong Huaneng Power Development Co. Ltd became the first PRC company to list its securities directly in New York ( where its shares are called N shares in China). 

Partly because Chinese are very concerned about face-saving (ai mian zi) and partly because the effective supervision of local authorities, so far the overall performance of 43 Chinese companies listed overseas is not bad.  In 1997, 39 of the 43 overseas listed companies recorded profits, totaling nearly RMB 15 billion, while 60% of the overseas listed companies sustained growth in profitability. [20] Three companies, Shanghai Petrochemical, Guangdong Kelon and Datang Power, were once rated by the Hong Kong Stock Exchange and the Asian Money Magazine as the “best managed companies”, “best information disclosure companies”, “best global growth companies in Southeast Asia”, and “best investor relationship companies”. [21]

Though Chinese companies are zealous in going to foreign stock exchanges, the regulator, on the contrary, is very cautious in the process of examining and approving applications.  The CSRC set up very high standards, thereby only China’s star enterprises and large key enterprises in their respective industries can be approved. [22] According to the governing regulations and rules, any application to be listed outside the PRC must be subject to the approval of State Council Securities (SCSC).[23]  Moreover, the requirements of corporate governance and shareholders protection upon overseas companies are much higher than those upon domestic companies.  In the Special Regulations of the State Council on Raising Capital and listing Overseas by a Joint Stock Company, it is required that companies issuing shares on overseas markets must maintain their accounts in compliance with both international standards and principles generally accepted in China.  Any inconsistencies between the information contained in the various language versions must be explained publicly. [24]  Another distinctive feature of the Regulations is its elaborate procedures for shareholders notice, according to which, all shareholders holding overseas shares of a company are to be registered with the company,[25] but the company may keep outside PRC its register, and entrust a foreign agency (such as Depository Trust Company – DTC) to administrate it.[26]  In case of a meeting to be held, notice must be given in writing to all current record shareholders, and shareholder’s reply must be received 20 days before the scheduled meeting.[27] Second public notice all shareholders must be sent in case that replies received amount to less 50% of the voting rights. [28] Those procedures, never appearing in previous laws, set forth a clear standard to ensure shareholders to exercise their rights.  In addition, empowered by the regulations, the SCSC prescribed the Mandatory Articles of Association of Companies for Overseas Listing, requiring all overseas listed companies to incorporate it in their articles of associations. [29] In commentators’ view, the Mandatory Provisions represent a new benchmark in the development of corporate law, more advanced than that of the Corporation Law, perceived by Chinese’s legislators, judges, and scholars. [30]