High-Tech Chinese Province Attracts U.S. Exchanges

By Maria Trombly | Securities Industry News | September 4, 2006

In 1986, New York Stock Exchange chairman John Phelan visited China and met with leader Deng Xiaoping. In 1997, Chinese president Jiang Zemin returned the favor, coming to New York and ringing the opening bell--a gesture repeated in 2004 by Premier Wen Jiabao.

These relationships reflect the NYSE's status as the market of choice for Chinese blue chips--the huge state-owned enterprises going public. Sixteen NYSE-listed companies are from mainland China, with a capitalization exceeding $420 billion. Another 14 NYSE listings are from Taiwan and Hong Kong. That compares with 28 Chinese companies on the Nasdaq Stock Market--with a combined market cap under $750 million.

But of the ten Chinese companies that went public in the U.S. last year, nine were listed on the Nasdaq, including the well-known search engine Baidu, which was the most successful Nasdaq initial public offering in five years, rising from $27 to $154 and raising $109 million.

On top of that, IPOs have recently been moving to Hong Kong, most notably that of the Industrial & Commercial Bank of China, the country's biggest bank, scheduled for October. The bank hopes to raise $21 billion, which would make it the largest IPO ever. In June, the Bank of China's Hong Kong IPO brought in $11.2 billion, the fourth-largest on record.

Hoping to reverse the trend, the NYSE is courting early-stage Chinese companies through a memorandum of understanding (MOU) with Jiangsu province, home to the historic city of Nanjing. NYSE will be the official "stock exchange of choice" for Jiangsu companies that list in the U.S. In return, the exchange will provide training programs to help Chinese companies prepare for NYSE listing.

In May, Nasdaq signed a similar MOU with Jiangsu.

It's more about marketing than business substance, but the stakes are unmistakably tangible and huge. China has been the source of several record-breaking IPOs in the past few years, and another wave of privatizations is in the offing as the economy opens up under the World Trade Organization guidelines and previously restricted government-owned shares become publicly tradable. These changes will force previously state-owned companies to become more competitive and responsive to markets and drive them to raise money through stock offerings.

Jiangsu is a hotbed of small, entrepreneurial and midsize enterprises. According to a project agenda set by the provincial government in 2004, some 100 Jiangsu companies were slated to go public on a foreign market between 2005 and 2007. Of those, 34 have already listed overseas.

Nasdaq has traditionally been more attractive for high-growth start-ups like those in Jiangsu. "They had lower listing requirements," notes Larry Tabb, head of Westborough, Mass. research firm Tabb Group. "It's been less expensive and typically known as more technology-oriented."

NYSE expects to be more competitive with its electronic NYSE Arca platform, where it will be more economical to list than on the main exchange. Two U.S. companies have listed on NYSE Arca--Darwin Professional Underwriters and BFC Financial Corp.--but NYSE says that several Chinese companies are in the listing pipeline. When they are ready to move to the main board, they will pay no initial listing fee and no annual fee for their first partial calendar year.