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Chinese IPOs – The Glow Is Gone – For Now

By Scott B. MacDonald

Throughout the late 1990s and first few years of this century, China was hot. Everyone wanted to find a way to play China. After all, Asia’s largest economy was showing dynamic economic growth, political stability (including a peaceful transfer of leadership), and a growing middle class. The new China, fully part of the global economy, needed (and still does) vast inputs of oil, natural gas, coal, copper, nickel, and alumina for industrial production and a better national infrastructure. The expanding middle class was hungry for foreign consumer goods. The world rushed to meet these demands. China also was willing to allow its vast numbers of companies to seek foreign financing.

One aspect of this was the boom in Chinese equity Initial Public Offerings (IPOs) over the last couple of years. The NYSE has a total of 16 Chinese companies and there is a sizeable number of OTC (Over The Counter) ADRs for Chinese companies. According to The Asset, Chinese corporates raised an estimated $6 billion through overseas IPOs in 2003.

It was expected that Chinese companies would raise $7 billion in overseas markets via IPOs in 2004. That number now looks unrealistically high for three reasons. First, the Chinese government is seeking to slow the pace of growth (9.4% in Q1 2004). Inflation is an increasing worry. The big question is can Beijing manage a soft landing in the economy (we think yes) or does China have a hard landing ahead (many people are worried about this)?

Second, many investors are finally waking up and discovering that Chinese companies have a poor track record with transparency and disclosure. Considering that global investors have been burned by Enron, WorldCom, Nortel and Parmalat, Chinese companies do not look as attractive as the did when the economic boom looked set to continue forever. Investors are now asking questions and many Chinese CEOs do not want to answer, hence the decline in new IPOs.

The last factor is that many of the Chinese companies that have issued IPOs already have not been stellar performers. A number of investors complain that performance has not met expectations and management doesn’t care.

Chinese IPOs are no longer on the menu – at least for now. They will be back. However, in the interim, the Chinese government has considerable work ahead in terms of cleaning up its banks (filled with bad loans), managing a slower pace of economic growth, and dealing with the enormous challenge of meeting the rising expectations of the population. For many investors the China glow is gone. They have moved on to other places to invest. But we expect that once the soft landing is managed, those IPOs will be back. We hope everyone has learned something from this last round of China mania – transparency and disclosure do matter.

Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Keith W. Rabin, Robert Windorf, Sergei Blagov, Darrel Whitten and Jonathan Hopfner

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© 2003 KWR International, Inc.