Foreign capital markets are strongly appealing to Chinese enterprises for their scale, high efficiency and good services. Now, Chinese enterprises are seeking to be listed in foreign stock exchanges as the best way to do business abroad, with the United States the most favored destination.

In 2013, 66 Chinese enterprises were listed abroad, accounting for 15.1 percent of the global total of newly listed companies. They raised a cumulative US$19 billion, 18.9 percent of the world total.

The first half of 2014 witnessed 10 Chinese enterprises successfully listed in the U.S. and raising US$3.1 billion, a year-on-year growth of 900 percent and 3,830 percent respectively. Then in September 2014, China's e-commerce giant Alibaba made its initial public offer (IPO) in New York Stock Exchange, raising US$21.8 billion, an historical record in the U.S.

Founder and Executive Chairman of Alibaba Group Jack Ma celebrates as the Alibaba stock goes live during the company’s initial price offering at the New York Stock Exchange in New York City, Sep 19, 2014.  [Photo: Shanghai Daily]

The confidence crisis

Despite the increase in overseas listings, Chinese companies still need to have a hard look at the confidence crisis that embroiled some of them in the U.S. three years ago. This will help them gain insight and experience for doing business in the international capital market. Such a review will also help international investors understand the problems that Chinese firms encounter when they integrate with the world economy.

The most recent crisis began in October 2010. Over the following five months eight Chinese firms were delisted from the U.S. In March 2011, the situation deteriorated. From March to June, 24 Chinese companies listed in the US suffered from auditors who resigned or exposed their financial problems, and 19 were suspended or delisted. American critics exaggerated these cases, highlighting deception by Chinese companies and fanning the flames.

In the following months the mistrust for small and medium-sized Chinese reverse takeover (RTO) firms gradually escalated into a crisis affecting all Chinese concept stocks. Stockbrokers adjusted their policies, and the American supervisory body adopted much stricter requirements towards Chinese firms engaged in RTO and investigated two Chinese concept firms.

Adversely influenced by these factors, Chinese concept stocks plunged, even those not engaged in financial fraud. Of the 13 Chinese firms listed in the U.S. in 2011, 12 fell below their offering prices.

Lessons learned

Thorough examination of the crisis could help pinpoint the reasons and lessons behind it.

First, it must be acknowledged that the actions taken by the U.S. Securities and Exchange Commission(SEC) and security broking institutions all fell under the category of normal supervision and investment practices. The SEC's warnings and investigations as part of its regulatory duties. Moreover, U.S. brokers were reasonable in banning clients from borrowing capital to buy Chinese concept stocks. Deleveraging was not in particular targeting Chinese firms, and shortselling is a normal practice in the American capital market. The overall situation was not out of hand, as China concluded. After all, of those Chinese firms facing credit problems, fewer than ten percent were suspended or delisted.