Chinese Gripe at Being Left Out of Alibaba’s IPO

Zhou Nushi, a retired factory worker in Shanghai, would like to buy shares of Alibaba Group Holding Inc. as the Chinese e-commerce company prepares to go public in what may be the biggest initial share sale ever.

The trouble is she can’t. Like most Chinese, she doesn’t have the financial resources and extensive qualifications necessary to invest in securities listed outside the mainland. Alibaba, based in Hangzhou, is listing its stock in the U.S.

“I’m a little confused about why you can’t invest in a Chinese company if you’re Chinese,” said Zhou, clad in gray shorts as she passes time in front of the digital stock ticker at a local branch of Guotai Junan Securities Co. in Shanghai.

Though Chinese consumers have driven Alibaba’s financial success, they’ll largely be left out of the company’s stock offering. Mainland investors can’t purchase overseas equities directly due to government restrictions and only the wealthiest can buy them indirectly through qualified investor programs.

Alibaba, which started marketing its stock in Asia this week, generated so much interest that it plans to increase the size of its IPO, people familiar with the matter said. One of the people said the top end of the marketed price range will be bumped to just below $70 a share. Alibaba was previously marketing the shares at $60 to $66, which would raise as much as $21.1 billion.

After including an over-allotment option, the sale could surpass Agricultural Bank of China Ltd.’s raised $22.1 billion IPO in Hong Kong and Shanghai in 2010. Alibaba Chairman Jack Ma said today that the company plans to expand in Europe, the U.S. as well as in Asia.

Alibaba Change

The inability of mainland investors to buy into such an historic IPO may lead to change. Mao Sheng, an analyst at Huaxi Securities Co. in Chengdu, said it’s regrettable local investors can’t buy into the deal and that may push the government to accelerate reform of its IPO system.

“IPO reform takes time,” said Mao. “The government takes the development of the capital market very seriously, so it will improve.”

Even as President Xi Jinping pledged in November to give markets a “decisive” role in the $9 trillion economy, the nation’s securities regulator still pressures companies seeking IPOs to price them at below-average valuations in an effort to protect small investors. Alibaba decided on the New York Stock Exchange for its IPO after considering Hong Kong. It has left open the possibility of listing shares in China later.

The China Securities Regulatory Commission has said it’s preparing to move toward an American-style IPO registration system and may announce a plan by the end of the year. The CSRC didn’t respond to a faxed request for comment.

Around Bans

“The review process is more efficient in the U.S.,” said Hao Hong, a Hong Kong-based strategist at Bocom International Holdings Co. “Listing in the U.S. also commands prestige in China.”

Some funds have been set up for investors looking to tap into Alibaba. Harvest Fund Management Co., one of China’s oldest and largest asset managers, has started Harvest Opportunities Target Fund 1 to give Chinese investors access to the Alibaba IPO.

“It’s not one fund but a range of funds that allow our mainland clients to buy shares of Alibaba,” Lindsay Wright, co-CEO of Harvest Capital Management Co. Ltd., the Beijing-based subsidiary of Harvest Fund, said in a phone interview.

Chinese investors can purchase foreign securities indirectly through what’s known as a Qualified Domestic Institutional Investor program. Such funds are run by asset managers who give broad guidelines of what they plan to invest in and then choose specific stocks.

Richest Chinese

Shenzhen-based Rongtong Capital Management Co. will introduce a program that enables clients to buy Alibaba shares through the firm’s special program for qualified investors, the China Daily reported July 4.

That fund will be limited to the richest Chinese. The minimum investment in these programs is about 1 million yuan ($163,000) with an expected yield of about 120 percent and investment period of three months, the paper said, citing a company prospectus. Rongtong Capital officials weren’t available to comment on the report.

QDII funds have had a difficult time attracting investors because they’ve performed poorly even after global markets recovered from the sub-prime crisis. The first four QDII funds have lost between 10 percent and 30 percent since their inception in late 2007.

Lost Value

China may have the world’s second-largest economy and some of its biggest companies, yet its stock market has been rocky until recently. The Shanghai Composite Index lost $460 billion of market value in the three years through May, the most in the world, while almost 5 million stock accounts were liquidated. The index rose 0.3 percent to close at 2,339.14 today.

The government is eager to lure the Chinese back to the stock market to reduce speculative investing in the property market and curb risks tied to lightly regulated wealth-management products. Since March, investors have pushed up the Shanghai gauge 13 percent and the pace of new account openings rose the highest in almost six months in the week ended Aug. 22.

After being frozen for a year, the pipeline for domestic initial offerings was reopened late last year. IPOs on the mainland this year have surged an average 43 percent in their first day of trading.

Still, the domestic market’s far behind leading exchanges.

“China’s capital markets are screwed up,” said Gary Rieschel, Managing Partner at Qiming Venture Partners, which has more than $1 billion of investments in China. “If you look at the listing process, the government still picks companies. It’s a disaster tying up a lot of capital unproductively.”

Offshore Accounts

And that makes getting cash into the U.S. markets compelling enough for Chinese investors to risk getting around restrictions on taking currency overseas.

It’s also possible for Chinese to invest in Alibaba if they can get down to Hong Kong to open up an offshore account in one of the brokerages there. Yet few are likely to go through that trouble, said Zhang Gang, a strategist at China Central Securities in Shanghai.

“The procedure is complicated and it’s not easy to gain access,” Zhang said. “Local investors will probably just stay put with domestic shares than to go through that trouble.”

Sandy Mehta, CEO of Value Investment Principals Ltd., is optimistic things will change soon.

Controls Relaxed

“Just as we are seeing Chinese increasingly travel abroad and buy properties globally, controls will be relaxed over time enabling investments in foreign stock markets,” he said in an e-mail. “We are seeing this in other Asian markets such as India, and with Hong Kong Connect, markets should open up both ways. When Chinese citizens are able to invest in foreign shares, it will have a noticeable impact on fund flows and stock prices globally.”

The changes will come too late for investors who want to buy into Alibaba’s debut. Sitting next to Zhou at the Shanghai brokerage, clutching a packet of “Double Happiness” cigarettes was the owner of a small taxi company surnamed Zhu.

“I know there are some ways to buy the shares, but it’s too complicated,” he said. “I need a U.S. dollar account and I don’t trust some of the illegal ways of buying the shares.”

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