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CSRC clampdown sees first IPO pulled

Following reports about the Chinese regulator getting tougher on IPO candidates, the new measures already seem to be having the desired/feared effect. From Finance Asia today (and probably soon to disappear behind the paywall):

Only a day after China’s securities regulator announced it would closely vet the financial statements of listing hopefuls, companies started withdrawing their applications for new share sales.

Guizhou Zunyi Titanium, a titanium sponge producer, announced on Thursday that it would cancel its long-awaited initial public offering and has received confirmation from regulators on the withdrawal. Zunyi was the first company to scrap its IPO plans and more companies are expected to do the same.

Deloitte said earlier this month that about 20% to 25% of current IPO applicants on the mainland may withdraw or re-consider their listings in 2013. If that estimate is correct, up to 220 companies will cancel A-share IPOs this year, lowering the waiting list to 662 firms — still a big number.

Despite the disquiet of the brokers – who of course benefit from higher numbers of IPOs, regardless of the quality of the company – this is probably a good thing. A shortage of listed companies is not the main problem for the A share market.

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CSRC tries to clear IPO pipeline

China’s securities regulator has decided to toughen its review of companies aiming to list on the A share market, according to several recent stories including a couple of  reports in Caixin.

All of the 882 companies waiting for China Securities Regulatory Commission (CSRC) approval to go public have been required to submit their financials for 2012 by the end of March. The regulator said it would check the results at randomly chosen firms to prevent fraud.

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China and corruption in context

An interesting working paper called “Is Corruption in China ‘Out of Control’? A Comparison with the US in Historical Perspective” came out at the beginning of December. It’s worth reading the whole thing, but the succinct abstract does a good job of summarising it for those in a hurry.

This paper compares corruption in China over the past 15 years with corruption in the U.S. between 1870 and 1930, periods that are roughly comparable in terms of real income per capita. Corruption indicators for both countries and both periods are constructed by tracking corruption news in prominent U.S. newspapers. Several robustness checks confirm the reliability of the constructed corruption indices for both countries. The comparison indicates that corruption in the U.S. in the early 1870s — when it’s real income per capita was about $2,800 (in 2005 dollars) — was 7 to 9 times higher than China’s corruption level in 1996, the corresponding year in terms of income per capita. By the time the U.S. reached $7,500 in 1928 — approximately equivalent to China’s real income per capita in 2009 — corruption was similar in both countries. The findings imply that, while corruption in China is an issue that merits attention, it is not at alarmingly high levels, compared to the U.S. historical experience. The paper further argues that the corruption and development experiences of both the U.S. and China appear to be consistent with the “life-cycle” theory of corruption — rising at the early stages of development, and declining after modernization has taken place. Hence, as China continues its development process, corruption will likely decline.

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Winding up the Chinese B share market

It’s rare that anything interesting happens in China’s moribund B share market, but the last couple of weeks have been an exception – even if all the developments point to it no longer existing in the relatively near future.

Owing to China’s capital controls, there are several different types of stock listings used by Chinese companies. To recap quickly:

  • A shares are mainland-incorporated Chinese companies listed on the mainland Shanghai and Shenzhen exchanges and are denominated in renminbi. They can only be bought by mainland Chinese investors and a very limited number of qualified foreign institutional investors.
  • B shares are mainland-incorporated Chinese companies listed in Shanghai and Shenzhen and are denominated in US dollars (in Shanghai) and Hong Kong dollars (in Shenzhen). They can be freely bought both by foreigners and by mainland investors with foreign currency accounts.
  • H shares are mainland-incorporated Chinese companies listed in Hong Kong. They can be freely bought by foreigners.
  • Red chips are companies controlled by the Chinese state, but legally incorporated outside mainland China and listed in Hong Kong. Again, they can be freely bought by foreigners.
  • P chips are companies controlled by private sector Chinese businessmen that are legally incorporated outside mainland China and listed abroad. Usually, P chip is used to mean specifically Hong Kong listed stocks, with S chip being used for private firms listed in Singapore and (less commonly) N share for US-listed Chinese companies and L share for London-listed Chinese companies.
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China unlikely to open A share market for many years

Following India’s decision to open its equity markets a little further to foreigners – and recent proposals to do the same for bonds – Chinese reformers are apparently pushing to loosen the even-tougher controls on foreign investment in their country.

As the FT reports, a new report from the central bank advocates a medium-to-long-term plan for removing restrictions, culminating in a largely convertible renminbi:

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India considers opening stock market to foreign individuals

Reuters is reporting that the Indian government is considering relaxing restrictions on foreign individuals investing in Indian shares, in an attempt to attract more foreign capital. If this goes ahead – and that’s a big ‘if’ – it could be a very exciting development.

Very few countries actively bar foreign individuals from investing in their stock markets, although some make it difficult. Oddly enough, it’s the BRICs – the four emerging markets that foreign investors talk about the most – that are the hardest. And India is arguably the most frustrating of all.