China Drives IPO Upswing

But some observers warn that buyers should beware.
Alan RappeportJanuary 8, 2008

The aches of the credit crisis and the pains of stiff market regulation could have added up to a slowdown of new public offerings on American exchanges in 2007. Instead, thanks largely to interest in Chinese companies, it turned out to be the most active year for IPOs in the last seven.

According to Renaissance Capital’s 2007 IPO review, last year marked the largest number of public offerings for the most money since 2000, with 234 deals worth $54 billion. That was up from the 2006 tally of 198 deals worth $43 billion.

“Driving the IPO market were fast-growing Chinese companies in search of U.S. capital and hot U.S. technology companies,” the report said.

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The number of Chinese IPOs nearly quadrupled from 2006 to 2007, as 34 firms went public. China-based companies — spread across industries such as energy, advertising, biotechnology, and real estate — comprised about half of the top 25 firms, according to Renaissance.

Showing less of a spike, Hoover’s IPO scorecard, which tracks offerings on the New York Stock Exchange, Nasdaq, and American Stock Exchange, found a 2 percent increase in the number of IPOs in 2007. According to Hoover’s, a research firm, top American exchanges attracted to 209 IPOs worth $48.6 billion. As with the Renaissance survey, Hoover’s noted a strong IPO push from China. Chinese firms accounted for 20 percent of IPOs in the fourth quarter and provided a significant boost.

“With mortgage-sector woes and prospects of slower economic growth in the United States, investors began looking overseas,” said Tim Walker of Hoover’s.

Despite the bounce in IPOs in America, overseas exchanges still proved to be fertile ground. Dealogic reports that in 2007 Europe raised $100.4 billion through 357 offerings, and Asia — minus Japan — had 451 IPOs raising $82.2 billion. Globally, Dealogic recorded 1,317 deals worth $291.3 billion last year, up from 1,097 IPOs that raised $241.6 billion in 2006.

Although exchanges have been trying to lure Chinese companies, some say the China firms have not been models of good behavior. According to Rate Financials, a New York-based research firm, major Chinese companies traded on the NYSE have “very poor quality of earnings, inadequate corporate governance standards, and serious accounting-related issues.”

Victor Germack, president of Rate Financials, argues that Chinese firms are burdened by strict control from their government, a lack of transparency, and insufficient cash flow. Further, many of them operate with negative working capital and do not file annual proxy statements, thanks to exemptions for foreign private issuers on American exchanges.

Some argue that those risks are the price paid for attracting foreign firms. “The exemptions they are encouraging the exchange to abandon were put in there for a good reason,” said Frank Adams, a partner at Dewey & LeBoeuf, a corporate law firm. “You can’t argue against greater transparency, but you have to be careful what you wish for. If the exchange were to make those changes, it would be very difficult for non-U.S. companies to be listed in New York.”

Renaissance Capital predicts even more public offerings from Chinese firms in 2008, especially in advance of the summer Olympics. Technology and energy are expected to be among the strongest sectors.

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