For decades both Chinese and foreign companies in China used to circumvent murky Chinese corporate legislation by setting up so-called VIE´s on outside tax heavens, while the government basically looked away. Those days seem to be over, writes accounting professor Paul Gillis on his webblog, and the question is: what´s next?
There is a interesting editorial in Caixin … It was written by Wang Rao, CEO of Chinese investment bank e-Capital. Wang argues it is time for overseas listed Chinese companies to unwind their VIE structures and seek listing at home. The editorial comes on the heels of an announcement that Chinese investment manager Shengjing had launched an investment fund dedicated to helping overseas-listed Chinese to delist and list instead on China’s stock exchanges. I have long argued that Chinese markets are the appropriate place for Chinese companies to list, since Chinese investors and regulators are better able to understand the companies. The Chinese stock markets, however, have not developed sufficiently for this to happen, I had forecast it would take 5-10 for the necessary reforms to make domestication possible. It appears that things may be moving faster than I expected.
The main factor driving this thinking is the rapid development of China’s own stock markets. The China Stock Market (SSE Composite) has more than doubled in the last year. Perhaps even more important is the success of China’s new third board, the National Equities Exchange and Quotations (NEEQ). NEEQ listed an average of 193 companies a month for the last four months, and now lists 2,343 companies with a total market cap of over US$180 billion. These are mostly small companies with an average market cap of only $77 million. Regulators have promised to tighten supervision of this lightly regulated market, and time will tell whether this market will be plagued with the rash of frauds that were seen with US reverse mergers on the US OTCBB.
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