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IPOs – The Glow Is Gone – For Now
Scott B. MacDonald
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
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.