- Special Pages
By Pete Sweeney
Foreign short-sellers are telling China it has a credibility problem, and Beijing seems to be listening.
Investors are betting that many Chinese companies listed on overseas exchanges will lose substantial value or even delist, with green energy and technology companies -- two sectors championed by the government as key to China’s transition from a low-cost manufacturer -- among the most targeted.
Not so long ago, Beijing could have ignored the foreign calls for greater transparency or doubts about business models, even after investors were burnt. The China story of limitless growth sold itself, and investors were keen for any entry into the world’s biggest growth engine.
But now Chinese companies need to access overseas markets to tap funding for their domestic growth. And so Beijing is taking steps to address some of the concerns, including a tour to meet foreign mutual fund managers and other investors.
“I think Chinese regulators are quite concerned about the competitiveness of these firms if they are lagging behind in terms of access to capital markets,” said Douglas Jiang, a Washington DC-based research analyst at Snowball Finance.
NEW BALL GAME
Unlike the high-profile short-selling attacks of 2010-2011, which mostly targeted unknown small-cap firms that had used a loophole to gain listings on overseas exchanges, the short money is now betting more broadly against some of China’s better-known internet and clean technology firms.
“The first time around they were caught off guard. The companies that were being targeted were very much private companies. They were under the radar screen,” said Fraser Howie, analyst at CLSA and co-author of several books on China’s financial system.
“This time around it’s not the same guys. These are more the financial flag bearers for China ... (Regulators) are clearly doing more to bring foreigners into the market, so the last thing they want is more short-selling.”
A short-seller borrows shares from a stockholder, paying them interest. The stocks are then sold, with the shorter banking the proceeds. To make a profit, the shorter needs the shares to lose value before they are returned to the owner.
Share utilisation ratios (URs) -- which measure how many shares available for lending are out on loan, and are considered a proxy measure of the shorting of a stock -- are unusually high for many Chinese firms listed abroad, according to data from financial information provider Markit viewed on September 21.
Further, the interest rates to borrow those shares are also high - up to 50 percent in some cases - indicating lenders see imminent risk of prices declining and are seeking protection.
The ratio for Chinese companies with American Depositary Receipts (ADRs) trading in the US was 12.91 percent, over three times that of lendable shares of firms making up the S&P 500 index .SPX.
Solar power and dotcom firms comprised the majority of the US-listed Chinese ADRs with the highest URs. Chinese companies listed in Hong Kong also featured high URs in many cases, but were more widely distributed among sectors including real estate and finance.
“A high utilisation ratio means a lot of people are short the stock. I think there’s a big credibility factor on a lot of these stocks that are short,” said Gerard DeBenedetto, CEO of AZ Investment Management in Shanghai
That said, that foreign distaste for Chinese firms in globally troubled sectors should not be misconstrued as prejudice against all Chinese firms.
“It’s not systematic. For foreign investors, it’s about transparency,” DeBenedetto said.
Data on the mutual fund flows from Lipper, a Thomson Reuters company, shows net flows into the China-focused offshore equity funds have been negative for the last six quarters.
Rob Morris, head of forensic accounting at AlixPartners in Hong Kong, said it has become increasingly difficult to access filings Chinese companies make to the State Administration for Industry and Commerce, which can be used to double-check statements Chinese firms make to foreign investors.
There are signs that China understands it needs to do more to improve investor confidence, although analysts say progress so far has been largely symbolic. They would like to see Beijing follow through on commitments to crack down on insider trading and make management teams more accountable to shareholders.
Officials from the Shanghai and Shenzhen stock exchanges embarked on a global tour in September aimed at restoring overseas investors appetite for Chinese equities, in particular mainland-listed companies available through the Qualified Foreign Institutional Investor (QFII) programme.
Beijing may also be finally warming to the prospect of US regulators double-checking the work of Chinese auditors. An official at the US Public Company Accounting Oversight Board (PCAOB) said on September 21 that US authorities have reached a tentative agreement with Beijing to allow them to observe official auditor inspections in China.
If the deal is finalised, it would mark a change in attitude from a year ago, when an official at the Shanghai stock exchange accused the PCAOB of politicising the auditing issue, and encouraged Chinese companies listed in New York to delist and come back to IPO in Shanghai or Shenzhen.
The last thing Chinese regulators want these days is a raft of returnees trying to list on already struggling domestic boards, nor do they want such firms to line up at overburdened Chinese banks for fresh capital.
“I think in an ideal world, Chinese companies ought to by default list in China,” said Kai-Fu Lee, former head of Google China, now CEO of technology incubator Innovation Works.