Big Apple blues

FINANCE & ECONOMICS

Foreign listings in New York

Jan 27th 2005 HONG KONG
From The Economist print edition

China's banks are the latest companies to shy away from a New York listing

IF YOU can make it there, as the song has it, you can make it anywhere. At least as far as New York's stock exchange is concerned, however, more and more non-American companies are deciding that they cannot—and some are no longer even willing to try.

European firms have been complaining for months about the rising costs and increasingly strict requirements of a listing on the New York Stock Exchange (NYSE), once considered essential for any self-respecting global corporation. Now two of China's big state banks, which are planning billion-dollar international flotations this year, may also be thinking again. At a time when big stock exchanges are vying for business from the mainland, London recently beat New York to win the overseas tranche of the initial public offering (IPO) of Air China, the country's flag carrier.

A big reason is the Sarbanes-Oxley act. Passed in the wake of the Enron and WorldCom scandals, this law calls for auditors to approve a company's procedures for preventing fraud and ensuring that its accounts are correct. It also requires managers to certify the effectiveness and adequacy of internal controls in year-end filings. For foreign companies registered with the Securities and Exchange Commission, America's main securities regulator, compliance with the internal-controls rule is due to start with the financial year ending on or after July 15th.

As well as the cost of all this in terms of time and money, foreign managers hate the thought of being sued in America if things go wrong. European bosses have been lobbying the SEC vocally, apparently with some success. On January 25th, William Donaldson, its chairman, said that he may give non-American firms more time to comply with the internal-controls clause. He may also change the SEC's rules to make delisting from American exchanges easier.

This might not satisfy Chinese firms, which have much further to go than Europeans in improving corporate governance. Marcia Ellis, of Paul Weiss, a law firm, says that although Hong Kong (the standard destination for Chinese listings) is in many ways a more demanding place to list than New York, “once you are on the New York exchange, life is much tougher. You are subject to class-action law suits and the SEC is a vigorous enforcer of the rules.”

China Life, the mainland's largest life insurer, has already discovered this. It is being investigated by the SEC and has a class-action suit pending, having failed to disclose old liabilities when it listed in America last year. The accounts of the banks are in far worse shape.

Just this week, Bank of China, which wants to raise $3 billion-4 billion in its IPO, admitted that two officials at a northern branch had absconded after embezzling 1 billion yuan ($120m), in the latest of several such scandals in the past few years. Although BOC, just like China Construction Bank (CCB), which is hoping for $5 billion-10 billion from its own flotation, is working hard to clean itself up, Standard & Poor's, a rating agency, noted that “the incident underlines weaknesses in the bank's relatively new internal control procedures.” It is no wonder that Liu Shiwei, assistant to BOC's head of restructuring, says that although the bank has not yet decided where its shares will be listed, “Sarbanes-Oxley will strongly influence our decision.”
Fading attraction?

Nor, say Chinese bankers, is the prestige of an American listing what it once was. “The halo effect has gone,” says an adviser to CCB, pointing to the fall from grace of Richard Grasso, the former head of the NYSE, and the fact that Enron and WorldCom were listed in New York. He adds that Chinese companies get higher trading volume and broader coverage by analysts in Hong Kong and Singapore, where listing is also cheaper. “There is really no reason for a Chinese company to list in New York unless it is a technology firm, where the ratings are higher.”

Even so, New York has not lost all of its lustre. If BOC and CCB do shun the Big Board, they might still send a bad signal to potential investors, just when the banks are already struggling to persuade foreign banks to take minority stakes. So a refusal to take on New York could bode poorly for their IPOs. Nobody said making it there was easy.

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