Listings by Foreign-Invested Companies on Mainland
Chinese Stock Exchanges Once Againin the Limelight
Eiichi Sekine

I.

Introduction

With the enactment in May 2007 of legislation governing the establishment ofoffices in China by overseas stock exchanges and the opening in September 2007 of
an office in Beijing by the New York Stock Exchange followed by the NASDAQ, theLondon Stock Exchange, the Tokyo Stock Exchange, the Singapore Stock Exchange,
and the Korea Stock Exchange, overseas stock exchanges have been redoubling theirefforts to encourage Chinese companies to list their shares overseas.
Since then, however, attention has turned to moves by foreign-invested companies
to list their shares on Chinese stock exchanges. Following the third Strategic
Economic Dialogue between the US and Chinese governments in Beijing lastDecember, it was agreed that foreign-invested companies (including foreign-invested
banks) will be able to apply to the Chinese government to issue renminbidenominated shares and bonds.1 There have been a number of cases in the past of
local subsidiaries set up by foreign-invested companies issuing and listing renminbidenominated shares (so-called "A shares") in China itself. Although a number of
Taiwanese and Japanese companies have already issued and listed renminbidenominated shares, the issue of such shares by foreign-invested companies is once
again in the news as a result of the afore-mentioned agreement between the US andChina. According to local Chinese news reports, foreign-invested companies otherthan Japanese companies have approached the China Securities Regulatory
Commission (CSRC) and Chinese stock exchanges with a view to listing A shares.2
This report examines (1) the listing of A shares by foreign-invested companies
amidst renewed interest in the subject among capital market participants, (2) recent
moves and financings by foreign-invested companies in China, (3) the attitude of theChinese government towards (and actual cases of) the listing of A shares by foreign1

2

8

The Strategic Economic Dialogue, based on an agreement between President Bush andPresident Hu Jintao, is a forum for the US and China to discuss economic issues and has
been held three times (once every six months) since December 2006. Financial market
opening has been one of the main issues discussed.
The 15 January 2008 issue of China Securities Journal mentions the following
nonfinancial corporations and financial institutions in this connection: Coca-Cola, Siemens,
HSBC, Bank of East Asia, and DBS.

Nomura Capital Market Review Vol.11 No.3

invested companies in order to form a view of the attitude of the Chinese government
and likely moves by Japanese and other foreign-invested companies.

II. Moves into China and Financings by Foreign-Invested
Companies
1. Recent moves by foreign-invested companies into China
1) Ways for foreign-invested companies to enter the Chinese market
It is now 30 years since the Chinese government's market-oriented reforms of 1978
paved the way for the entry of foreign-invested companies to the Chinese market.
Foreign-invested companies have two main ways of entering the Chinese market:
portfolio investment (where there is no local subsidiary) and direct investment (wherea local subsidiary is established). There are four different types of direct investment(Figure 1): (1) wholly foreign-owned enterprises (WFOEs), (2) equity joint ventures(EJVs), (3) cooperative (or contractual) joint ventures (CJVs), and (4) foreigninvested companies limited by shares (FCLS). While the first three types are limited
liability companies, the fourth is a joint stock company. Collectively the four different
types of local subsidiaries are referred to as "foreign-invested enterprises" (in the
narrow sense) as distinct from "foreign-invested companies" (in the broad sense),
which includes companies located outside China ("overseas companies").
However, in this report we refer to both foreign-invested enterprises and overseas
companies as "foreign-invested companies" unless there is a particular reason to
distinguish between them.
Figure 1: Types of Foreign-Invested Companies in China
and Definitions Used in This Report
Location

Foreigninvested
company(broadsense)

Mainland
China(foreigninvested
enterprise)

Overseas

Note:
Source:Companytype

NameDefinition

WFOE

Wholly foreign-owned limited company

EJV

Limited joint venture between Chinese and foreigncompany

CJV

Joint venture between Chinese and foreign company
where each side's rights and obligations are set out ina contract. There are two subtypes: an incorporated(limited company) type and an unincorporated type.

Company
limited by FCLS
shares

Structure can be changed from a newly or previously
established limited company

Limitedcompany-

Overseascompany

WFOE = wholly foreign-owned enterprise; EJV = equity joint venture; CJV =cooperative (or contractual) joint venture; FCLS = foreign-invested company
limited by shares.
NICMR.
Listings by Foreign-Invested Companies on Mainland Chinese
Stock Exchanges Once Again in the Limelight92) Examples of moves into China by foreign-invested companies
China's Ministry of Commerce has published figures on foreign direct investment(number and value of contracts as well as the actual amount invested) since thereforms of 1978 (Figure 2).3 Foreign direct investment in China in 2007 (excludingbanks, securities companies, and insurance companies) totaled 37,871 contracts (8.7% y-y) while the actual amount invested was $74,768 million (+13.6% y-y), thelargest amount ever.

Figure 2: Foreign-Invested Companies in China(No. of contracts)($100mn)
2,500

90,00080,0002,000

70,00060,0001,500

50,00040,0001,000

30,00020,000500

10,000
0
79~82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
2000
2001
2002
2003
2004
2005
2006
2007

0

No. of contracts (lhs)
Amount invested (rhs)

Source:Value of contracts (rhs)

NICMR, from Japan-China Economic Association and Ministry of Commerce data.

A breakdown by country/region of origin reveals that the largest direct investment
in 2007 in terms of the actual amount invested was by Hong Kong ($27,703mn).
Japan was the fourth largest direct investor ($3,589mn) and the US the sixth largest($2,616mn) (Figure 3).

3

China's statistics on foreign-invested companies give the number of contracts and theamount of money contracted for as well as the amount of capital actually invested.
However, no figures on the amount of money contracted for have been published since
2006.

10

Nomura Capital Market Review Vol.11 No.3

Figure 3: Breakdown of Foreign Direct Investment in China
by Country/Region of Origin

Notes:

Source:Rank

Country/Region

1
2
3
4
5
6
7
8
9
10
(cf.)

Hong Kong
British Virgin Islands
Korea
Japan
Singapore
US
Cayman Islands
Samoa
TaiwanMauritiusEU
Total from aroundthe world

Contracts
Number Share (%)
16,208
42.8
1,883
5.0
3,452
9.1
1,974
5.2
1,059
2.8
2,657
6.9
342
0.9
765
2.0
3,229
8.7
243
0.6
2,384
6.3
37,871

100.0

Amount invested$mnShare (%)
27,70337.1
16,552
22.1
3,678
4.9
3,589
4.8
3,185
4.3
2,616
3.5
2,571
3.4
2,170
2.9
1,774
2.4
1,333
1.8
3,838
5.1
74,768100.0(1) Ranking is according to the actual amount invested in 2007.
(2) The foreign direct investment figures include inward investment via Hong Kongand tax havens.
(3) The EU has 15 member states.
NICMR, from Ministry of Commerce and JETRO data.

3) Importance of local finance
The reasons for foreign direct investment in China have become more diversified,with a growing number of companies targeting the Chinese consumer, whose income
has been steadily rising (domestic-demand-related investment), rather than simply
taking advantage of low wage levels to produce exports for either their home market
or third countries. 4 A growing number of nonmanufacturing companies (in, forexample, wholesaling and retailing) have also entered the Chinese market in recent
years.
As the competition between local foreign-invested and Chinese companies has
intensified, it has become increasingly important for foreign-invested companies toincrease their local content and reduce their costs in order to use the capital they haveinvested as efficiently as possible. In particular, it has become increasingly importantfor domestic-demand-related companies, whose revenue is ultimately in renminbi, tobe able to raise capital in the same currency.

4

According to figures from Japan's Ministry of Economy, Trade and Industry (METI)'s
Quarterly Survey of Overseas Subsidiaries, local sales accounted for 45.6% of the salesof local subsidiaries based in China (including Hong Kong) in fiscal 2005, 52% in fiscal
2006, and, most recently, 53.7% in fiscal 2007 Q3 (Oct–Dec).
Listings by Foreign-Invested Companies on Mainland Chinese
Stock Exchanges Once Again in the Limelight 11

2. Local financing subject to numerous restrictions
1) Total investment amount and minimum capital requirements
Capital transactions in China are still subject to certain restrictions, including
restrictions on the size of foreign-invested enterprises and the industries in which they
may operate. As far as the former (company size) is concerned, foreign-invested
enterprises need to meet the requirements for "total investment amount" (the total of
the shareholders' equity, or capital, needed to start up a locally incorporated company
and that company's debt) (Figure 4).5 A foreign-invested enterprise's level of approvalalso varies according to its total investment amount.

Figure 4: Schematic Diagram of Rules on Total Investment Amountand Foreign Debt

"Total investment amount""Debt" (= foreign debt limit)•Local currency loans
guaranteed by parent
company•Parent/subsidiary loan

"Shareholders' equity"

Notes:

Source:(1) "Total investment amount" – "shareholders' equity" = "debt" (= foreign debt
limit).
(2) "Foreign debt limit" = "short-term (12 months or less) foreign debt" +"cumulative accrued medium- to long-term (more than 12 months) foreign debt".
(3) Debt guaranteed by a parent company is treated as "foreign debt" when it isrepaid.
NICMR.

Furthermore, foreign-invested enterprises have to meet certain minimum capitalrequirements that depend on their total investment amount (Figure 5). This is because,in addition to the minimum capital requirements of Chinese company law,6 there are
separate provisions for imposing higher minimum capital requirements where this isnecessary. This is intended to prevent companies being established which are
undercapitalized and depend too much on debt.

5

6

12

China's State Council (i.e., cabinet) is selective about the types of foreign-invested
companies it allows, classifying their activities according to its Interim Provisions for
Guiding Foreign Investment as "desirable," "permitted," "restricted," and "forbidden." Its
Industrial Catalogue for Foreign Investment lists "desirable," "restricted" and "forbidden"
activities in more detail.
A limited liability company must have a registered capital of at least RMB30,000.

Nomura Capital Market Review Vol.11 No.3

Figure 5: Minimum Capitalization Requirements for
Foreign-Invested Enterprises

Total investment amount

Minimum capitalization
requirement(as % of total
investment amount)Remarks$3mn or less70%

$3–10mn

50%

Minimum capital requirement of $2.1mn if
total investment amount is $4.2mn or less$10–30mn

40%

Minimum capital requirement of $5.0mn if
total investment amount is $12.5mn or less

At least one third

Minimum capital requirement of $12.0mn if
total investment amount is $36.0mn or lessMore than $30mn

Source:

NICMR.

2) Strict monitoring of borrowing limits
Once a company's total investment amount and capital have been decided, thedifference between them is its "debt." Any liabilities that a company incurs must notexceed its borrowing limit. Let us know take a look at how Japanese companies haveraised funds using their borrowing limits.
As foreign-invested enterprises have not been allowed to raise funds on China's
capital markets by issuing corporate bonds or commercial paper, their first recourse
will be to borrow the funds from a bank.
There are two types of bank loan in China, depending on the currency involved.
One is a foreign currency loan. The lender may be either the Chinese branch of aJapanese bank or the parent company ("parent/subsidiary loan"). The other is a local
currency (i.e., renminbi) loan. The lender may be either the Chinese branch of aJapanese bank or a local bank. In the case of both types of loan, a loan from the
Chinese branch of a Japanese bank to a Japanese company must normally beguaranteed by the company's parent.

3) Registration of foreign debt as a further factor complicating the monitoring ofborrowing limits
A factor further complicating the monitoring of the borrowing limits on foreigninvested enterprises is the strict monitoring of foreign debt. In China, foreign debt (i.e.,
foreign currency owed to nonresidents by Chinese organizations) is monitored by anumber of authorities (the State Development and Reform Commission , the Ministryof Finance, the State Administration of Foreign Exchange), depending on the
borrower. Foreign-invested enterprises are required to register any foreign debt with
their branch of the State Administration of Foreign Exchange within 15 days ofsigning a loan agreement.

Listings by Foreign-Invested Companies on Mainland Chinese
Stock Exchanges Once Again in the Limelight 13

In addition, foreign-invested enterprises' foreign debt limits are subject to thefollowing restrictions (see Figure 4 above).

(1) Foreign debt incurred by foreign-invested enterprises must not normally exceed
the difference between their officially approved total investment amount andregistered capital (i.e., their borrowing limit).
(2) Medium- and long-term foreign debt (with a maturity of more than 12 months) is
calculated on a cumulative accrual basis. Short-term foreign debt (with amaturity of not more than 12 months) is calculated in terms of balances.
(3) Loans from a local financial institution (including local Chinese branches ofJapanese banks) guaranteed by a borrower's parent company are regarded as
foreign debt when the parent company repays the debt on behalf of the borrower.
(4) If a foreign-invested enterprise borrows more than the difference between its
total investment amount and its registered capital, the department that originallyapproved it must reassess its total project investment amount.

In practice, this reassessment is likely to take some time. Foreign-invested
enterprises therefore need to allow plenty of time for monitoring any loans that areclassified as foreign debt and be prepared in advance to arrange a sufficient limit on
the assumption of a guarantee by their parent company. Although it is now easier tomonitor foreign debt than it used to be as a result of a series of reforms that take theneeds of both lenders and borrowers into account, the fact that capital transactions are
regulated and the continuing existence of limits on borrowing and foreign debt limit
the scope of companies to raise funds.

3. Impact of tightening policy of financial authorities
A further factor complicating the use of strictly monitored borrowing limits andforeign debt limits is the tightening policy of the financial authorities. Since 2007, thefinancial authorities have strengthened the ceiling on bank lending as well as
increasing loan and deposit rates, raising the reserve requirement ratio, and making
greater use of open market operations.
One is setting (or tightening) the ceiling on renminbi loans (in the domestic
market). Since the Communist Party Congress in mid-October 2007, China's Banking
Regulatory Commission (CBRC) is reported to have instructed commercial banks not
to increase their loan balances.7 An analysis of month-end renminbi loan balances in2007 reveals that the net increase declined as the year-end approached. Similarly, an
7

See Nihon Keizai Shimbun, 2 December 2007.

14

Nomura Capital Market Review Vol.11 No.3

analysis of the cumulative change in loan balances in the same year reveals that the
net annual increase was more or less unchanged at about RMB3,500 billion from endOctober, indicating that the net annual increase in loan balances was, to all intents andpurposes, capped at the equivalent of a 10-month increase as a result of the ceiling(Figure 6). In 2008, however, loan balances increased by a net RMB800 billion in
January alone and by a cumulative RMB1,800 billion in January-April. This means
that, if the same ceiling is applied as in 2007 (RMB3,500 billion), 49.3% of this year's
ceiling has already been used as of end-April and that, in the second half of the year,
financial institutions are likely to become increasingly reluctant to lend.

Figure 6: Changes in Renminbi Loan Balances (2007, Jan–Apr 2008)(RMB100mn)
40,00035,00030,00025,00020,00015,00010,000
5,000
0

2007
1

2

3

4

5

6

7

Change in renminbi loan balances

Source:

8

9

10

11

12

2008
1

2

3

4

(Cumulative) change in renminbi loan balances

NICMR, from People's Bank of China data.

The other is the trend of foreign currency loans and deposits (in the domestic
market) (Figure 7). Foreign currency loans are funded either by foreign currency
deposits or by foreign currency borrowed overseas. While foreign currency deposit
balances have been declining or growing only very slightly on a monthly basis since
the second half of 2007, foreign currency loans have increased as an alternative torenminbi loans. This indicates that the foreign currency loan/deposit ratio of Chinese
financial institutions has been rising (i.e., that their foreign currency liquidity position
has been deteriorating). Also, the Chinese authorities have been tightening theircontrol over the means available to Chinese financial institutions to borrow foreign
currency overseas. When Chinese financial institutions (whether local or foreigninvested) borrow foreign currency from overseas, this is regarded as "foreign debt." In2007, the Chinese authorities adopted and implemented a policy, which we believe is
still in force, to reduce the country's short-term foreign debt in order to stop inflows of
hot money. Financial institutions may therefore find themselves unable to meet
corporate demand for funds as their access to overseas sources of foreign currency
loans is also restricted.

Listings by Foreign-Invested Companies on Mainland Chinese
Stock Exchanges Once Again in the Limelight 15

Figure 7: Foreign Currency Loan and Deposit Balances (2007, Jan–Apr 2008)($100mn)
3,000
2,500
2,000
1,500
1,000
500
0

2007
1

2

3

4

5

6

7

8

Foreign currency loan balance

Source:

9

10

11

12

2008
1

2

3

4

Foreign currency deposit balance

NICMR, from People's Bank of China data.

Therefore, with companies finding it difficult to borrow either renminbi or foreign
currency, they have increasingly had to consider alternatives to bank loans. The
situation is even more difficult for foreign-invested companies, which are subject tothe afore-mentioned limits on borrowing and foreign debt. They have therefore begun
to consider issuing corporate bonds and commercial paper (two areas that have still tobe deregulated) as well as A shares (an area that has already been opened up to the
local subsidiaries of foreign-invested companies).

III. Listing of A Shares by Foreign-Invested Enterprises
1. Legal framework
1) General framework
New share issues and share listings in China are governed by the New Company
Law and New Securities Law, both of which came into force on 1 January 2006, andconducted according to the following five sets of associated rules: (1) Measures for
the Administration of Securities Issuance by Listed Companies (in force since 8 May
2006), (2) Measures for the Administration of Initial Public Offering and Listing ofStocks (in force since 18 May 2006), (3) Measures for the Administration of
Securities Issuance and Underwriting (in force since 19 September 2006), (4)Measures for the Public Offering Review Committee of the CSRC (in force since 9
May 2006), and (5) Interim Measures on Securities Issuance and Listing Sponsor
System. We will not go into the rules' detailed provisions for share offerings andissues.8 However, the procedures for listing differ from those in Japan in the following
respects.
8

For further details see Nomura Institute of Capital Markets Research, "Chugoku Shoken
Shijo Taizen" [Compendium of Chinese Securities Markets], Nihon Keizai Shimbunsha,
Ch. 1, 2007.

16

Nomura Capital Market Review Vol.11 No.3

The first concerns the body responsible for screening listing applications. In China,
the CSRC, which reports directly to the State Council (i.e., the cabinet), is responsible
for vetting companies that apply to issue shares as well as the terms of these issues
and for granting the final approval for such issues. To be more precise, companies that
apply to list their shares have to be recommended by the underwriter and apply to the
CSRC as well as a stock exchange for a listing, final approval for which is given by
the CSRC's Public Offering Review Committee.
The second procedure for listing that differs from the system in Japan is thesponsor (or sponsorship) system. Under this system, a securities company familiar
with the procedures for listing shares acts as an advisor ("sponsor") to companies
listing or issuing shares for the first time. This is similar to Japan's lead manager
system. However, in China the "sponsor" is also legally responsible for ensuring that acompany meets its disclosure requirements after its shares have been listed.

2) Rules governing foreign-invested enterprises
The offering and listing of shares in foreign-invested companies is governed by anumber of special regulations: the Provisional Regulations of the Ministry of Foreign
Trade and Economic Cooperation (now the Ministry of Commerce) on Several Issues
Concerning the Establishment of Foreign-Invested Companies Limited by Shares(promulgated in January 1995), the Opinion on Some Issues in Relation to Listing
Foreign-Invested Enterprises (promulgated by the Ministry of Foreign Trade andEconomic Cooperation, now the Ministry of Commerce, and the CSRC in October2001), and the Special Regulations of the CSRC Governing the Content and Formatof Offering Prospectuses of Foreign-Invested Enterprises (promulgated in March
2003) (Figure 8). In particular, the Opinion on Some Issues in Relation to Listing
Foreign-Invested Enterprises is clearly conscious of foreign-invested enterprises
listing on domestic stock exchanges, following China's accession to the World Trade
Organization (WTO).

Figure 8: Special Regulations Governing Listings by Foreign-Invested
Companies Limited by Shares
Promulgating department

Date ofpromulgation

Name

Ministry of Foreign Trade and January 1995
Economic Cooperation (nowMinistry of Commerce)"Provisional Regulations on Several Issues
Concerning the Establishment of Foreign-Invested
Companies Limited by Shares"

Ministry of Foreign Trade and October 2001
Economic Cooperation (nowMinistry of Commerce),
CSRC"Opinion on Some Issues in Relation to Listing
Foreign-Invested Enterprises"

CSRC"Special Regulations Governing the Content andFormat of Offering Prospectuses of ForeignInvested Enterprises"

Source:March 2002

NICMR.

Listings by Foreign-Invested Companies on Mainland Chinese
Stock Exchanges Once Again in the Limelight 17

The main points of these special regulations are listed in Figure 9. However, theregulations on "sponsors" (i.e., company founders) will probably have to be amended
to take account of the New Company Law. This is because the special regulations
state that at least three of the five sponsors (i.e., a majority) must be Chinese. (This is
in line with Article 75 of the Old Company Law, which states: "To incorporate a joint
stock limited company, there shall be five or more sponsors, of which more than halfmust have their domicile within the territory of the People's Republic of China.") As aresult, foreign-invested enterprises sometimes had to rearrange their capital structure(e.g., by transferring some more of their equity to the Chinese sponsors) whenconverting to a joint stock limited company before an initial public offering or listing.
However, Article 79 of the New Company Law states: "To establish a joint stock
limited company, there shall be not less than 2 but not more than 200 initiators [i.e.,company founders], of whom half or more shall have a domicile within the territory of
China." As a result, the existing special regulations will have to be amended.
Moreover, it is questionable whether it is appropriate to automatically apply the newlaw to initial public offerings and listings by wholly foreign-owned enterprises, whichhave increased since China joined the WTO.

Figure 9: Main Points of Special Regulations Governing Listings
by Foreign-Invested Companies• A foreign-invested enterprise planning to list must first convert to a company
limited by shares• It must have passed the annual inspection for foreign-invested enterprises during
the three years preceding its application• Its operations must conform to the "Interim Provisions for Guiding Foreign
Investment" and the "Industrial Catalogue for Foreign Investment"• At least three of the five sponsors (i.e., a majority) must be Chinese (i.e., foreigninvested enterprises may have to transfer some more of their equity to theChinese sponsors)• After listing, the foreign-owned shares of a foreign-invested company limited byshares must not be less than 10% of the total shareholders' equity• After listing, a foreign-invested company limited by shares must return its
certificate of approval if its foreign-owned shares account for less than 25% of thetotal shareholders' equity (i.e., it will lose its status as a foreign-invested
enterprise and become a Chinese-invested enterprise)
Source:18

NICMR, from Special Regulations.

Nomura Capital Market Review Vol.11 No.3

2. Most A share listings have been by Taiwanese and Japanese companies
An analysis of the figures on A share listings by foreign-invested enterprises
reveals that, while most listings have been by Taiwanese companies, Japanesecompanies have accounted for a significant proportion of the listings by other foreigninvested enterprises (Figure 10).9
In October 1996, Shenyang Neu-Alpine Software Co., Ltd. (a joint venture
between Alpine Electronics, Inc. of Japan and Neusoft Group, Ltd., China's largest
software company) was the first Japanese company to list A shares on the Shanghai
Stock Exchange. 10 This was an exception as at that time there were no special
regulations governing listings by foreign-invested enterprises. In January 1999, a joint
venture between the medium-sized Japanese textile manufacturer Matsuoka Corp.
(based in Fukuyama in Hiroshima Prefecture) and its Chinese partner became the firstJapanese company to list B shares.11 The joint venture's A shares were subsequently
listed in March 2001.
In May 2004, a joint venture between the Japanese automobile component
manufacturer Mutsumi Special Alloy Industry Co., Ltd. (based in Machida in Tokyo)
and its Chinese partner became the first non-Taiwanese foreign-invested enterprise tolist A shares on the Shanghai Stock Exchange following the promulgation of theOpinion on Some Issues in Relation to Listing Foreign-Invested Enterprises in
October 2001. In May of the following year, a joint venture between the Japaneseclothing manufacturer Mitsuwa Co., Ltd. (based in Seki in Gifu Prefecture) and its
Chinese partner listed A shares on the Shenzhen Stock Exchange. What Matsuoka,
Mutsumi and Mitsuwa have in common is (1) that they have listed on a Chinese stock
exchange even though they are unlisted medium-sized companies in Japan, (2) that
their Chinese operations have been doing well and they therefore need access to aplentiful supply of local currency (i.e., renminbi), and (3) that listing A shares has
given them access to low-cost local funds for capital investment.

9

10

11

As the stock codes of Chinese stock exchanges do not distinguish between Chinese andforeign-invested companies, we have used information from Chinese securities
companies and media reports to do this.
See Mitsuhiro Seki, "Chugoku no Sangaku Renkei" [Cooperation between Industry andAcademia in China], Shinpyoron, Ch. 3, 2007. Shenyang Neu-Alpine Software Co., Ltd.
was the first Chinese software company to list on a stock exchange.
B shares are issued with a view to being purchased by foreign investors and are traded inforeign currency, although par value is in renminbi. Since February 2001, Chinese
investors with access to foreign currency have also been allowed to trade them.
Listings by Foreign-Invested Companies on Mainland Chinese
Stock Exchanges Once Again in the Limelight 19

Figure 10: Actual Listings of A Shares by Foreign-Invested Enterprises
Listed company

DatelistedExchange Industry

Parent(country/ (name)region)Shenyang Neu-Alpine 96/6/18
Software Co., Ltd.

Shanghai IT

Japan

Shanghai Matsuoka
Co., Ltd.

Shanghai Textiles/
apparelJapan

01/3/28

Zhejiang King
03/12/30 Shanghai Electronics Taiwan
Refrigeration Industry
Co., Ltd.
NBTM New Materials 04/5/11 Shanghai Machinery Japan
Group Co., Ltd.

Hefei Rongshida
Sanyo Electric Co.,Ltd.

04/7/27

Shanghai Electronics Japan

Jiangsu Sanyou
Group Co., Ltd.

05/5/18

Shenzhen Textiles/
apparelJapan

Shenzhen Globe
05/5/25
Union Industrial Corp.

Shenzhen Building
products

Taiwan

06/11/24 Shenzhen Building
products

TaiwanGuangzhou Seagull
Kitchen and BathProducts Co., Ltd.
HL CORP(Shenzhen)
GEM-YEAR
INDUSTRIAL
CO.,LTD.
Shanghai Hanbell
Precise MachineryCo., Ltd.
Shanghai CIMIC Tile
Co., Ltd.

Pre-IPO
Issue price Issue PER Issue amount
Lead manager Market cap
shareholding (RMB/share)(RMB10,000)
as of 08/6/11(foreign(expenses)(RMB10,000) (¥100mn)
investors)
1,579,610
2,452
Alpine
37%
6.98
17.45
10,470450 Huaxia
Electronics, Inc.
Securities(now China
Securities)
n.a
16.4
n.a
132,840
4,141 Guotai Junan
409,734636
MATSUOKA
Securities
Corporation,
Ltd..
(Fukuyama,
Hiroshima
Prefecture)
Chen Tianlin
45%
7.30
20.00
29,2001,800 United Securities
105,215163

Mutsumi Special
Alloy Industry
Co., Ltd.
(Machida,
Tokyo)
Sanyo Electric
Co. Ltd.
(Moriguchi,
Osaka
Prefecture)
Mitsuwa Co.,Ltd.
(Seki, Gifu
Prefecture)
Globe Union
Industrial (BVI)
Corp., etc.
n.a

60%

10.00

13.89

45,0001,800 Guolian
Securities

124,925

194

35.38%

2.60

18.18

22,1002,008 Ping An
Securities

254,745

395

40%

3.55

21.65

15,975

1,355 Guoyuan
Securities

90,18814097.48%

8.60

20.48

43,8602,003 GF Securities

142,621

221

52%

8.03

27.69

35,734

1,481 China Merchants
Securities

167,580260

1,476 Ping An
Securities
2,726 Huatai Securities

147,668229

507,329787

07/1/12

Shenzhen Machinery Taiwan

n.a

79.90%

3.40

29.99

23,12007/1/26

Shanghai Machinery Taiwan

98.62%

4.26

23.72

89,46007/8/17

Shenzhen Electronics Taiwan

98.50%

9.08

29.97

34,5042,146 Fortune
Securities

248,325385

07/8/23

Shenzhen Building
products

Taiwan96.37%

5.08

29.88

48,2602,648 Guosen
Securities

254,600

395(cf. B shares)
Shanghai Matsuoka
Co., Ltd.

99/1/18

Shanghai Textiles/
apparelJapan

Chin ChampEnterprise Co.,
Ltd., etc.
Capital Harvest
Technology
Limited, etc.
CIMIC
INDUSTRIAL
INC.
MATSUOKA
Corporation,
Ltd..
(Fukuyama,
Hiroshima
Prefecture)

n.a

0.28

5.54

21,3842,133 Shenyin &WanguoSecurities

97,066151

Notes:(1) In May 2001, Shenyang Neu-Alpine Software Co., Ltd. was renamed Shenyang
Neusoft Co., Ltd. Similarly, in October 2006, Shanghai Matsuoka Co., Ltd. wasrenamed Shanghai Nine Dragon Co., Ltd.
(2) We have converted renminbi to yen at the State Administration of Foreign
Exchange's central rate as of 11 June 2008 (RMB1 = ¥15.52).
NICMR, from company prospectuses and Haitong Securities data.

Source:IV. Outlook
1. Attitude of Chinese government
While China's Ministry of Commerce has encouraged foreign-invested enterprises
to list on Chinese stock exchanges as part of its policy to attract foreign capital,
China's financial authorities have studied this option as part of their policy torevitalize the country's capital markets, gradually deregulate capital transactions, andmake full use of the country's savings surplus. In the last three issues of its annual"International Financial Market Report," first published in 2005, the People's Bank of
China's International Financial Market Analysis Group (based at the Bank's Shanghai
Head Office) has proposed the following action on share issues: (1) that companies
listing for the first time should list both A and H shares,12 (2) that companies with H
12H shares are those shares offered for sale to foreign investors and listed on overseas
stock exchanges that are also listed on the Hong Kong Stock Exchange.

20

Nomura Capital Market Review Vol.11 No.3

shares should issue A shares in China itself, (3) that red chip companies13 should issue
A shares in China itself, (4) that foreign-invested enterprises should issue A shares, (5)that overseas companies should issue A shares, and (6) that Chinese depositary
receipts (CDRs) should be developed.
The CSRC still intends to encourage foreign-invested companies to list A shares,
partly as a result of the agreement reached after the third Strategic Economic Dialogue
between the US and Chinese governments in Beijing last December (see Chapter 1).
One of the priorities for 2008 identified at the National Work Conference on
Securities and Futures Supervision held by the CSRC in January 2008 was to improve
the quality and quantity of listed companies, while studying the possibility for (andencouraging) red chip and other overseas companies to list A shares was identified as
one of the means of achieving this. In particular, mainland listings by red chipcompanies can be seen as part of a move to encourage Chinese companies that havelisted on overseas stock exchanges to "come home."
According to reports in the Chinese media14 and interviews with Chinese securities
companies, the CSRC has decided that, now that foreign-invested enterprises havebegun to list on Chinese stock exchanges, the next move should be to study thepossibility for (and encourage) red chip companies to do this (e.g., by means ofChinese depositary receipts), and then to encourage overseas companies to list A
shares (Figure 11).15 However, the CSRC has yet to announce a timetable for suchmoves, whether by red chip companies or overseas companies.

Figure 11: Trend in Listing of A Shares by Foreign-Invested Companies
Stage 1

Stage 2

Stage 3

Locally registeredforeign-invested
enterprises list A shareson mainland Chinese
exchanges

Red chip companies
and companies
incorporated in Hong
Kong list A shares on
mainland Chinese
exchanges

Overseas companies
list A shares on
mainland Chinese
exchanges

Source:

NICMR, from media reports and Haitong Securities data.

If red chip companies are to list on mainland stock exchanges, a number of hurdles
will have to be overcome. These are similar to the hurdles that will have to be
overcome if overseas companies are to list on mainland stock exchanges. These
include: how to deal with A share companies whose capital does not exceed the
RMB30 million minimum required by the New Securities Law; how to convert capital
to renminbi; and what to do about discrepancies between Chinese and foreign
13
14
15

Red chip companies are Chinese companies incorporated in Hong Kong.
China Securities Journal, 4 March 2008 and 6 May 2008.
The issue of Chinese depositary receipts is not yet permitted.
Listings by Foreign-Invested Companies on Mainland Chinese
Stock Exchanges Once Again in the Limelight 21

accounting standards and years.16 We think existing rules will have to be amended andnew rules written.17

2. Japanese listing candidates
As far as Japanese companies are concerned, we see two possible developments.

1) Listings by medium-sized Japanese companies on mainland stock exchanges
One, as exemplified by Mutsumi Special Alloy Industry Co., Ltd., is for mediumsized companies to list shares on a mainland stock exchange. It is no exaggeration to
say that, when medium-sized Japanese companies set up operations overseas because
their domestic market looks like shrinking (as their business partners set up operations
on the Chinese mainland and Japan's demographic situation deteriorates), they arerisking their future. If they do this, they will not only need to source their basic
materials locally in order to keep their local production costs as low as possible, butthey will also need access to local sources of investment capital. As far as their parent
companies are concerned, their businesses are now, to all intents and purposes, locatedoverseas. Therefore, if their parent companies are unable to spare additional
investment capital, they will increasingly have to look for local sources of capital.
Also, the financial authorities' more restrictive monetary policy (see above) has madeit increasingly necessary for medium-sized Japanese companies to be able to tap
Chinese capital markets without having to resort to borrowing from a bank. Possible
sources of local capital include, in addition to the main board, the Growth Enterprise
Board, a venture capital market which the Chinese government hopes will be ready toopen this year. Companies operating in Hong Kong as well as the mainland also havethe opportunity to list in Hong Kong.18

16

17

18

22

China Securities Journal, 1 February 2008. It will presumably also be necessary to clarify
what conditions a foreign-invested company must satisfy as an issuer if it is locallyincorporated as a holding company.
In addition, candidate companies for listing will have to satisfy the requirement to useinternational accounting standards (a requirement for listed companies since 2007) andmeet the environmental standards for listed companies, which were tightened up earlier
this year. With regard to the latter, the State Environmental Protection Administration (nowthe Ministry of Environmental Protection) announced on 25 February 2008 that companies
in industries with a high environmental load would have to obtain its written consent if they
wished to apply to the CSRC for a listing or to issue new shares. The industries to which
this applies are thermal power generation, ironmaking, cement, electrolytic aluminum,
metallurgy, chemicals, petrochemicals, coal, building materials, papermaking, brewing,
pharmaceuticals, fermentation, textiles, leather, and mining.
On 1 December 2007 at the Sixth Small and Medium-Sized Enterprises Financing Forum,
Mr Lin Zheying, Vice Director General of the Department of Foreign Investment
Administration of the Ministry of Commerce, said that the Ministry would support foreigninvested companies seeking to list on a mainland stock exchange and, in particular, would
strengthen its ties with the CSRC and the stock exchanges in Shanghai and Shenzhen inorder to help foreign-invested companies to list on the Growth Enterprise Board, which isdue to open later this year.

Nomura Capital Market Review Vol.11 No.3

2) Listings by large Japanese companies on mainland stock exchanges
Another possible development is that large Japanese companies with large numbersof local employees will list on mainland stock exchanges. Business costs in China
have been rising as a result of a change in investment conditions without precedent inrecent years: harmonization of corporate income tax (abolition of preferential tax
treatment for foreign-invested companies), increases in the minimum wage, enhanced
rights for workers (e.g., as embodied in the new Labor Contract Law), inflation, astronger local currency, and measures to protect the environment. Japanese companies
with local operations in China therefore need to increase their productivity as well as
reduce their costs by increasing their local content. In order to increase theirproductivity, they will have to provide attractive working conditions (including fringe
benefits) and incentives. One such option would be to give their local employees theopportunity to acquire shares in them. One way of doing this would be to allow themto acquire shares in the Japanese parent company. China's capital controls now allow
individuals to acquire foreign shares directly, and, furthermore, employees areallowed to acquire locally listed shares by means of an employee share ownershipplan or stock options. 19 Also, once Chinese depositary receipts are allowed,
employees of foreign-invested enterprises will be able to acquire shares in their parent
in the form of such receipts. Allowing red chip companies to issue such receipts
would therefore also be an important first move for foreign-invested enterprises.
As foreign direct investment in China becomes more established and foreigninvested companies increase their local content, it will be interesting to see how the
Chinese authorities and both companies and financial institutions respond to (1) the
recent tightening of monetary policy in the short term, (2) the need to develop China's
capital markets in the medium to long term, and (3) the need for sources of capitalother than bank loans.

19

According to METI's latest Quarterly Survey of Overseas Subsidiaries (see above), local
subsidiaries of Japanese companies (including those in Hong Kong) employed 1,112,799
persons as of end-December 2007.
Listings by Foreign-Invested Companies on Mainland Chinese
Stock Exchanges Once Again in the Limelight 23