Listing of foreign enterprises in China: Future Possibilities

Jing Gang, Partner, and Wang Huapeng – Securities & Capital Markets Group 

1.The importance of foreign companies listing in China.

1.1 Permitting and attracting foreign enterprises to list on domestic stock exchanges is the norm on international capital markets.

From a global perspective, major securities exchanges are sparing no effort in attracting foreign enterprises to list, with foreign enterprises well represented on their lists of listed companies.

Looking at the circumstances of foreign companies listing on the world’s major exchanges,including the NYSE, NASDAQ, London, Tokyo, Singapore and Hong Kong, the average number of foreign companies listed stands at 14.2% of the total, with over 1875 foreign enterprises actually listed. These figures are higher than the combined total of the Shanghai and Shenzhen exchanges in China.

Name	Total Number of Listed Companies	Total Number of Listed Foreign Companies	Proportion
NYSE	2805	421	15%
NASDAQ	3200	335	10.5%
London Stock Exchange	2800	430	15.4%
Singapore Stock Exchange	728	268	36.8%
Tokyo Stock Exchange	2416	25	1%
Hong Kong Stock Exchange	1220	396	32.5%
Total	13169	1875	14.2%

1.2 The significance of permission for foreign enterprises to list on domestic stock exchanges.

The document Strategic Considerations for Foreign Companies Listing on China’s Securities Exchanges issued by China Securities Supervision Commission Research Center expounds the main significance of China’s permitting the listing of foreign companies’ listing on domestic stock exchanges. The main points include:

• The satisfactory progression of the expansion and strengthening of China’s capital markets;
•  Meeting investors’ multiplying wealth management investment needs;
• The listing of foreign companies on domestic exchanges contributes to China’s implementation of sustainable economic development.
• It contributes to a future good positioning in competing for listed companies’ resources.

Apart from this, attracting foreign companies’ listings on domestic markets is also important to the promotion and building of a capital markets legal system in China. The new issues raised by the listing of foreign companies in China such as cross-border controls, the corporate governance of multinationals, and the protection of domestic investors, to name but a few, are all challenges to the establishment and enforcement of securities law in China. In the process of facing these challenges, the level of standardization and internationalization of China’s establishment and enforcement of securities laws will greatly rise. At the same time, there will be a rise in the international-level experience directly received by regulators and other stake holders in China’s domestic securities regulatory organizations and securities service organizations leading to internationalized regulatory and service levels.

Either way, attracting domestic listings by foreign companies will be beneficial to the development of China’s capital markets. The summary of the results of the 4^th Sino-US Strategic Economic Dialogue clarifies that China will, subject to principles of regulatory prudence, permit foreign companies that meet certain criteria to list on Chinese securities exchanges through the forms of share offerings or depository receipts. Looking at this from a perspective of the development stage of China’s capital markets and from a policy level, the time for attracting the listing of foreign companies on domestic markets is ripe. However, some obstacles remain to be solved on a legal level and in the establishment of systems.

2 The current legal situation and obstacles for foreign enterprises listing in China.

2.1 The legal basis governing foreign enterprises listing in China.

In accordance with the rules stipulated in clause 12 of the Securities Law, shares, corporate bonds, and other issues and trades of securities in accordance with the law as stipulated by the State Council should be compatible with the Securities Law.

The legislative intent of the aforementioned regulations is comparatively broad: First, where securities are offered and listed domestically, they are principally governed by the Securities Law; Second, it seems that, where securities offerings and trades are made domestically they should be incorporated into the adjustment range regardless of whether the issuer is a domestic or foreign company. This can also be understood as Chinese Securities Law permitting the issue of securities in China by foreign issuers and domestic trade of those issues.

Although the 2^nd Clause of the Securities Law can be understood as permitting foreign companies to issue securities and conduct transactions domestically, the custom on China’s securities markets is that without an explicit regulation issued by the State Council or the China Securities Regulatory Commission to clarify permission for the listing of foreign companies on domestic markets, foreign companies seeking to list domestically may be getting ahead of themselves.

Apart from this, potential listings by foreign companies would probably be through a system of Depository Shares calculated in RMB which have yet to be provided for under Chinese law. This would probably require the China Securities Regulatory Commission to announce regulations classifying these as stock, or a regulation to be issued by the State Council to determine Depository Shares as a legal form of security.

2.2 The compatibility of the domestic listing of foreign companies with Company Law.

Although the Securities Law may be understood as permission for foreign companies to list in China and be applied as such, another fundamental law – the Company Law – acts as a standard in governing companies listed in China, the scope of which applies to all companies in China. The restrictions within the scope of the Company Law affect foreign companies listing in China in the following two ways:

1.  It forbids foreign companies from undertaking the issuance of any securities on domestic markets.

According to the Securities Law, when a joint-stock company publically offers shares it must conform to articles of the Company Law of the People’s of China. Thus, one may think, companies established outside of China publically issuing shares in China is not permissible under Chinese Law.

2. On an operational level, foreign companies face obstacles in listing domestically.

With the exception of new share issues and the issuance of corporate bonds, whether private offerings, public offerings of new shares, public bond offerings, and listings of shares and bonds, China’s securities laws have not clarified that these can only be made by domestically registered companies, as stipulated in the 2^nd clause of the Securities Law, it appears that the issuance of securities by foreign companies is, in principle, legal.

However, it is important to note that the legal framework governing corporate listings is contained in the two main laws, the Company Law and the Securities Law, particularly on a level involving sector specific regulations, most cite regulations of the Company Law. However, in view of the fact that the Company Law’s scope only covers domestically registered enterprises means that the framework of Chinese law governing listings mainly affects domestic companies. In this way, it presents several obstacles on an operational level to foreign companies seeking to list domestically. These obstacles include:

(1) The substantive conditions for listing

The relevant substantive conditions for IPOs and listings are mainly included in the Management Approach for IPOs and Listings as published by the China Securities Regulatory Commission. According to this document (Article 3), when instigating IPOs and listings, companies must satisfy all relevant stipulations of both securities law and company law. In isolation, this article seems to rule out the possibility of foreign companies carrying out IPOs and listings domestically. However, when considering the fact that Management Approach for IPOs and Listings, as a departmental regulation which has less force than the Securities Law, it is technically possible that there are other management practices for foreign companies.

(2)   Corporate Governance for listed companies

To ensure that listed companies have scientific administrative structures, China’s Company Law and other related legislation lay out in detail strict corporate governance structures. Although, from a global viewpoint, every country follows basic standards of corporate governance structures, it is inevitable that China’s laws on corporate governance structures will be different to those of foreign companies. Whether to permit the existence of these differences, how to choose between the differences and to integrate them, will both constrain foreign companies listing in China on an operational level.

(3) Accounting standards

According to company law, domestically listed companies must develop financial accounting systems and financial accounting reports according to China’s accounting and reporting regulations. Making it mandatory for foreign companies to develop their accounting systems and submit financial and accounting reports in accordance with the accounting regulations in China, is clearly not feasible. It requires some flexibility through observing basic international accounting principles.

(4) Information disclosure

Rules governing the information disclosure of listed companies are also governed by the Company Law and Securities Law. These disclosure rules are, to a large extent, procedural, however, the application of these rules will inevitably point to the application of Company Law. This will pose operational difficulties to foreign companies listing in China.