Chinese companies’ overseas share sales will rebound next year as regulators root out fraud and misconduct that contributed to erasing $6.4 billion in value for mainland firms listed in the U.S., the senior investment banker in China for JPMorgan Chase & Co. said.
There will be “a flurry of deals” once foreign investors’ confidence in Chinese companies returns, Fang Fang, chief executive officer of China investment banking for New York-based JPMorgan, said in an interview in Beijing yesterday. The bank is ranked third among managers of overseas share sales by Chinese companies since the start of 2010.
“I’m hopeful that sometime in the second half, investors will come back to the table,” he said. “Investors will eventually see the value and have to do something. They can’t just sit on a pile of cash for too long.”
A revival in overseas equity sales, on track this year to raise about a third of 2010’s $61.5 billion, would bolster growth in the world’s second-largest economy. Only one Chinese company has made its U.S. trading debut in 2012, compared with about 60 in the previous three years, as short sellers such as Muddy Waters LLC said companies including Sino-Forest Corp. misstated accounts, data compiled by Bloomberg show.
“There are just a lot of companies who want to raise money,” Fang said. “We need investors to come back to the table.”
The U.S. Securities and Exchange Commission cautioned investors in June 2011 about buying stakes in foreign companies entering the U.S. through so-called reverse mergers. The process, which entails the purchase of publicly traded shell companies to gain U.S. listings, may be prone to “fraud and other abuses,” the regulator had said.
The Bloomberg Chinese Reverse Mergers Index, which tracks 82 such companies, has lost 46 percent of its value since May 31, 2011, two days before Muddy Waters issued a report saying Sino-Forest overstated production. The allegation sparked a 74 percent drop in the Hong Kong- and Mississauga, Ontario-based timber company’s stock and drove borrowing costs above 60 percent before it filed for bankruptcy protection in March.
Muddy Waters founder Carson Block became the face of the short-selling wave against Chinese companies after his research led regulators to suspend trading in four of his first five targets, including Sino-Forest. Companies that have been highlighted more recently by the short seller include New Oriental Education & Technology Group Inc., China’s largest private education services provider.
New Oriental last week plunged 57 percent over two days in New York trading after the Beijing-based company said it was under investigation by the SEC and Muddy Waters questioned its accounting practices. The stock has since rebounded by 29 percent after New Oriental said July 19 that the allegations by Muddy Waters contained errors and were misleading.
U.S. investors filed a lawsuit against New Oriental on July 23 in Los Angeles seeking damages for the stock losses.
Companies on the reverse mergers index have lost as much as 99 percent of their value over the past year, led by China Nutrifruit Group Ltd. and Qiao Xing Universal Resources Inc. Those declines compare with the 25 percent drop in the Bloomberg China-U.S. Equity Index, which tracks the 55 most-traded Chinese shares in the U.S., and the 0.07 percent gain in the Standard & Poor’s 500 Index.
China Development Bank Corp., the nation’s biggest policy lender, is providing more than $1 billion to help companies leave the U.S. stock market, as allegations against other local firms surface.
Fushi Copperweld Inc. has gained 13 percent to $8.84 since the company said June 28 that it agreed to be bought out for $9.50 a share in a deal financed by CDB. The stock fell to a six-month low of $5.81 in April after Muddy Waters said the maker of copper-clad aluminum and steel wire “presents a high risk of fraud.”
Fushi denies those allegations.
Short-sellers such as Muddy Waters provide a “healthy mechanism to help clean the ecosystem,” said JPMorgan’s Fang, 46. His bank has managed two overseas IPOs for Chinese companies this year, down from four last year and 14 in 2010, data compiled by Bloomberg show.
“I have always been a proponent of having those mechanisms in place,” he said at his office yesterday. “Corporates need to take a practical view on why people sell short their stocks and shouldn’t feel emotionally.”
Fang, who is also vice chairman of Asia investment banking for the U.S. lender, began his career in 1993 as an associate at Merrill Lynch & Co. in New York. He joined JPMorgan in 2001 as an investment banker in Hong Kong.
In 2008, Fang was appointed as a member of the Chinese People’s Political Consultative Conference, making him the only executive from a U.S. financial company to be a part of the nation’s top advisory body to the government. The five-year term, set to end in March, gave Fang the authority to propose legislation, which he has used to promote greater internationalization of the yuan.
China and the U.S. must also resolve a dispute over regulation of accounting firms to ensure that mainland companies listed in the U.S. can attract investors and that American companies such as Yum! Brands Inc. and General Electric Co. can operate in China, Fang said yesterday. Yum, owner of the KFC and Taco Bell restaurant brands, has more than 4,600 locations in the Asian nation.
The SEC on May 9 sued Shanghai-based Deloitte Touche Tohmatsu CPA Ltd., alleging that the auditor refused to provide documents related to a China-based company under investigation for potential accounting fraud. The regulator last week asked for a six-month stay of a separate lawsuit against Deloitte so it can continue talks with Chinese authorities to obtain documents tied to a company in China, according to Bloomberg BNA, a division of Bloomberg LP.
Deloitte has said that under Chinese rules, accounting firms in the country aren’t allowed to hand documents to any foreign regulator without government approval. The firm argued in an April 11 filing to a U.S. district court that the SEC’s dispute is with the China Securities Regulatory Commission and should be resolved through diplomatic negotiations, according to a Bloomberg BNA Law report.
“Both sides need to come to the table and hash out an arrangement,” said JPMorgan’s Fang. “It will be a six- to 12-month process to sort it out, and for people to feel comfortable that the bad ones are weeded out, to get back to normal life.”
JPMorgan’s ties to China go back to 1911, when it led a syndicate in managing a $7.5 million bond sale by the Huguang Railway, according to the lender’s website. In 1921, Equitable Eastern Banking Corp., one of the bank’s predecessor firms, opened a Shanghai branch. The U.S. firm last week opened its seventh branch in the nation, in the city of Suzhou.
The lender in May increased capital at JPMorgan Chase Bank (China) Co., its locally licensed banking unit, by 2.5 billion yuan ($391 million) to 6.5 billion yuan. That was the second infusion since the subsidiary was incorporated in 2007, and will allow JPMorgan to increase loans to its largest clients in China, where foreign banks may lend a maximum of 10 percent of their net capital to a single borrower.
With 114 trillion yuan of assets at the end of last year, China’s banking system is larger than the combined size of the 30 other emerging markets tracked by Fitch Ratings, and smaller only than the U.S. and Japan.
The U.S. lender’s other operations in the country include asset management, venture capital and a commodity futures joint venture. It started offering investment banking services in China last year, after receiving approval for its joint venture with Shenzhen-based First Capital Securities Co. The venture, 33 percent-owned by JPMorgan, had 117 employees at the end of 2011, according to its financial report.
JPMorgan First Capital ranks 46th this year among underwriters of Chinese domestic corporate bonds, having worked on three sales for 2.64 billion yuan, according to data compiled by Bloomberg.
JPMorgan this year has managed five overseas equity and equity-linked offerings by Chinese companies that raised $678.7 million, the data show. That gives it a market share of 6.3 percent, putting the bank behind rivals including Bank of America Corp., Morgan Stanley and UBS AG.
Fang said the importance of China to U.S. companies such as Yum, and China’s need for foreign capital, means both sides “need to resolve” the dispute over regulation of accounting firms.
Fundraising by Chinese companies in overseas markets through equity offerings is set to lag behind that of previous years. Mainland firms have raised $10.8 billion through 52 such sales this year, compared with $27.2 billion in all of 2011 and $61.5 billion for 2010, the data show.
“I don’t think the Chinese government has the intention to cut off that financing avenue,” Fang said.
— With assistance by Aipeng Soo, and Henry Sanderson