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Merger, Acquisition & Transaction Consultants |
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King & Associates, P.C. |
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REVERSE MERGERS AND CHINESE CORPORATIONS
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2100 Fort Worth Highway Weatherford, TX 76086 |
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To contact us: |
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Phone: 817-598-1007 Fax: 208-693-3007 E-mail: Doug@ReverseMergersHome.com |
Want To Go Public NOW?
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(C) Copyright 2006-08 |
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The Shanghai Stock Exchange Composite Index hit a five-year high the week of October 15, 2006. It broke the 1,783.01 mark reached in April of 2004 and climbing to levels not seen since September 2001. While it is easy to say that following charts is a waste -- that numbers are just numbers -- the actions in Shanghai are probably worth a bit of reflection. In 2007 the Chinese government tripled the Chinese versions of their capital gains tax. This has caused a significant fall in the market do to the higher cost of selling stock. But, this cost adjustment will just be temporary.
For years now, there's been a significant performance gap between the Chinese economy and the equity market that's supposed to represent it. The difference has been more than just a matter of basis points. The economy has been growing at or near 10% a year, while Chinese shares have been in relentless decline since about the beginning of the decade.
The Shanghai Stock Exchange index hit 2,179.74 in April of 2001 and dropped over the next four years almost steadily, until hitting bottom at 1,000.52 in June 2005.
The reasons are many. Accounting has been a particular problem. Books in China are invariably cooked. It's tough to do business in the country; it's more difficult to invest there. Many Chinese companies have viewed their listings as personal ATMs and use money raised to finance personal projects or just to spend. |
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When a number of foreign banks and brokerages were allowed to buy local A-shares under the Qualified Foreign institutional Investor (QFII) program beginning in 2003, they complained privately that it was almost impossible to find enough companies to make up a portfolio. The accounts of most listed firms were just not believable.
Market infrastructure has also been an issue. Interestingly, the stock exchanges and the central depository have held up well. But the brokerages have not. It is only a slight exaggeration to say that the entire sector is technically bankrupt.
When the brokerages first got into money management, many of them sold funds with guaranteed returns. When share prices subsequently dropped, they had to pay out of their own very insubstantial capital. While the government has worked to clean up the brokers, they have remained by and large weak and this undermines confidence in the market.
But by far the biggest problem is the government. For Beijing, the stock market has generally been seen as secondary in importance. Foreign institutions want to invest more money in A-shares under the QFII program, but have been prevented by the central government. The bureaucrats want to keep the pressure off the renminbi and have sacrificed the equity markets to do so.
At the same time, Beijing has put quite a bit of direct and negative pressure on stocks. It needs desperately to raise money to fund its bankrupt pension system and it plans to sell shares in state companies to do so. While it has often said that it will hold back with its intended sale of stock, investors know the flood is coming.
The recent rise in stock prices could be viewed many ways. It could be just a consequence of better stage management by Beijing. The graph of the index is indeed suspiciously steep. The invisible hand may not be all that's at work here.
But there may also be some sound reasons for the rebound. China has been slowly but surely working to deal with weaknesses in the markets. It has driven a number of offending brokers out of business. It has started to deal with companies whose books are less than honest. And it has started to better understand its role in the management of the markets. U.S. equity investors desperately want to invest in Chinese corporations, but are scarred to do so until they are audited by foreign FASB auditors.
Overseas listings may be relevant here. As companies have undertaken IPOs and reverse mergers in foreign markets, attitudes have clearly changed. The exposure to unbiased regulation and strict disclosure rules may be having an impact on the way companies operate. They are starting to see value in openness. Until the government in Beijing gets control over it’s equity markets and accountants, the only way for a Chinese corporation to obtain the trust of foreign investors is to go public in the U.S. To date, since 2001, there have been 95 Chinese reverse mergers in the U.S. totaling $7B in market capitalization over the last two years. 68 of those reverse mergers have occurred in the last two years.
QFII has a similar influence. When foreigners first entered to A-share market four years ago, they sent a strong message. They said they had money to invest, but that they only wanted to look at the companies with clean accounts and honest management. They raised the bar and China may be rising to the challenge. For nearly three years now, the Chinese government has been issuing new policies regarding the use of offshore entities to acquire domestic operations. On May 29, 2007 the PRC State Administration of Foreign Exchange released Implementation Notice No. 106 which clarifies many of the earlier rules and appears to be a tightening of policy. Feel free to contact us if you wish to learn about the impact this will have on cross-border transactions, the challenges ahead and solutions that will still allow U.S. investment into Chinese companies.
The majority of the approximately 1,380 companies on China's two stock exchanges are State Owned Enterprises (SOEs). However, 65% of the Chinese economy is driven by high growth small and medium-sized enterprises in the private sector, part of which Wall Street terms the "middle market." Private ownership of businesses and assets is not only legal but also protected and strongly encouraged by the Chinese government because the thriving private sector provides the majority of jobs in China. Chinese domestic listings are virtually impossible for middle market companies due to an approximately three-year waiting period as a result of the thousands of listing candidates waiting in the pipeline. Global markets in Hong Kong, the U.S. and the U.K. have become viable alternatives with Hong Kong taking the No. 1 spot. Recently, private sector Chinese companies such as Mindray Medical, Suntech Power, and New Oriental Education and Technology have found enormous successes for themselves and for their investors by listing in the U.S.
The U.S. economy is built upon the principle of a free market, including the free flow of capital, people and businesses. Its well-regulated capital markets, managed by serious and professional regulators, efficiently serve a free market economy which is the envy of the world. A multi-cultural global environment involves many complexities. Narrow-mindedly assuming Chinese companies may not have appropriate corporate names or patents for their technologies is the wrong way to try to understand a foreign culture with 5000 years of history. It is important not to draw conclusions or speculate wildly without possessing some basic knowledge of China.
Embarrassing and ignorant comments such as "If a company's shares trade in the U.S., shouldn't its executives should be able to read and write English?" are just short-sighted. China has the highest English literacy rate in the world among non-English speaking countries. Chinese kids are required to have English language as a mandatory course from elementary school all the way to graduate school. That's over 10 years of English language study in a Chinese kid's life. How many of those 1,815 ADRs publicly listed in the US have all of their executives speaking perfect English? And how many successful US CEOs or commentators on China speak any Chinese at all? Let's be fair: What makes America strong is our openness which invites all cultures. Cultural sensitivity is critically important to the longevity and prosperity of our US economy. Taking a 13-hour flight to China will certainly help toward gaining a real and balanced perspective on China.
Chinese experts, who are actively involved in China-related businesses in the last two decades, have witnessed the transformation of China from a backward centrally planned economy to a gradually market driven economy largely due to successes in its private sector. After more than 25 years of economic development and robust growth, China's economic power and its thriving private enterprises are here to stay for a very long time. It is good to engage China and learn from each other.
That a business conducts its operations outside of the U.S. should not make it innately disreputable or questionable. Success is dependent on management's ability to create value for its shareholders. It is a company's earnings and prospects that should eventually count, not its country of origin. Fast growing Chinese companies may offer investors the same, if not greater opportunities, than those companies in mature markets. As evidence of the success of Chinese companies who want to go public in the United States, Chinese companies now account for one quarter of all of the reverse mergers in the U.S. currently.
It pays to be open minded. Isn't that what America is about? What makes America strong and makes me a proud American is the trust in the integrity of our capital markets and belief in our democracy. However, what makes America remain strong for years to come in a highly competitive world is our ability to continue to accept new things and not have prejudice against anyone no matter where they have come from, China or elsewhere.
At King & Associates, P.C., we do not take for granted the great value of the desire of some Chinese Corporations who wish to do business in the United States as a public company in the U.S. We resolve problems, recognize opportunities and create value for our clients. For this reason, we have created an affiliation with one of the few people in the United States, who is not only brilliant in his knowledge of the Chinese language and Chinese law, but personally knows all the, approximately, 150 Chinese bureaucrats who must personally sign-off on every Chinese reverse merger with a U.S. public shell.
Our affiliate travels to China every-other month with as many reverse mergers as he can carry. The trip to obtain the 150 signatures takes a month and costs each Chinese U.S. public shell buyer an additional $220,000, but you are welcome to get all the signatures yourself.
In addition to the sign-off by the 150 Chinese bureaucrats, each Chinese company which wishes to go public in the U.S. must obtain an SEC approved audit. This may seem more frightening then it is. But, you do not have to have your entire Chinese company audited by a U.S. auditor, just a U.S. subsidiary is required to be audited, in the least, before any closing contracts can be signed. But, the more Chinese corporations make themselves open and available to reputable outside audit standards, the more their stock, and trading price, will be taken seriously by international investors. This is why there are so many Chinese Corporations wishing to go public in the U.S.: because public Chinese corporations find it extraordinarily easier to raise capital after they go pubic in the U.S.
Our affiliate will be leaving for China in next in November 2007. If your transaction is ready, he can take your reverse merger contracts with him. If your transaction is not, you can wait until he returns to China a few months later. During December 2006, he took ten Chinese companies with him who wished to go public through reverse merger in the U.S. with gross revenues ranging from $50M to $500M. If you wish to include your contract in his up-coming trip to China in November 2007, he can take more. Feel free to contact us at any time.
Click here for a detail of all of last weeks successfully completed Chinese Reverse Mergers. |
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Click on any of the boxes for more information in Chinese. |
