Hollow logic

9 May 2016 By Robyn Mak

China has no one to blame for its latest stock market headache but itself. The securities regulator is scrutinizing the impact of overseas Chinese companies relisting at home via shell companies. Yet it is a self-inflicted problem. Dizzying stock market valuations and delays in reforming the initial public offering process are to blame. The regulator has had a hand in both.

The prospect of cashing in on higher valuations is luring Chinese companies home from the United States and even Hong Kong. Yet the conventional path to an A-share listing is mostly closed with a backlog of almost 800 companies waiting for regulatory approval to list.

That has forced A-share wannabes to seek an entry via the backdoor. So far this year, reverse mergers worth almost $21 billion have been completed. That’s six times the amount raised through traditional IPOs in the mainland over the same period, according to Thomson One.

The comments by the China Securities Regulatory Commission cast uncertainty on some big deals still in train. Shareholders have already voted in favour of a take-private plan valued at $9.3 billion by the management of Qihoo 360, the Chinese U.S. listed maker of antivirus software, but the company has yet to delist. Shares of online dating app Momo are now trading 22.9 percent below a buyout price offered by a consortium that includes e-commerce giant Alibaba .

Companies that attempt to exploit a valuation arbitrage play a risky game. Financial markets can move fast, erasing any premiums. Few will have anticipated a potential crackdown by the securities regulator to spoil the party, however. As the CSRC pays more attention to speculation on shell companies it might prove harder for those that want to delist to find vehicles into which they can reverse.

China’s regulator has helped to inflate domestic valuations by reducing the supply of new listings. A delay of the much anticipated registration-based system for stock market listings is further creating pent up demand. As long as the regulator keeps trying to control capital markets, problems like a rush for backdoor listings will arise.

 

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