The way home

The measures are, however, subordinate to the PRC Securities Law (中華人民共和國証券法), which again does not seem to close the door to foreign companies' IPOs. The second Article simply states that the law applies to the issuing and trading in the PRC of “shares, corporate bonds and such other securities as are lawfully recognised by the State Council”.

The key PRC laws covering listing do not, then, explicitly exclude foreign companies.

“It appears there's no express prohibition on foreign companies listing in China,” says Cathy Yeung, a partner in the Hong Kong office of Latham & Watkins. “I don't think the silence of the law or the lack of express provisions [will] be insurmountable obstacles.”

But she adds that explicit regulation will almost certainly be required under the PRC system. “I'd expect some specific regulations providing listing criteria and procedures and obligations for foreign companies, which I understand that the regulators have been working on for some time.”

Under Chinese law, Yeung explains, the lack of a prohibition does not mean that something is possible or permissible. This may surprise lawyers from common law legal systems, where there is the opposite assumption: if something is not expressly prohibited, it is permissible.

On the China Law Insight blog, King & Wood lawyers Jing Gang and Wang Huapeng write of other issues that will need to be clarified through regulation, for example “whether foreign companies should establish representative offices in China ... how foreign companies should conduct foreign exchange for fund-raising, whether fund-raising placements need to be restricted, and the supervision of fund raising for domestic investment ...”

There will also need to be clarification of the Securities Law, the lawyers write.

“Although [Article 2] of the Securities Law can be understood as permitting foreign companies to issue securities and conduct transactions domestically, the custom on China's securities markets is that without an explicit regulation issued by the State Council or the China Securities Regulatory Commission to clarify permission for the listing of foreign companies on domestic markets, foreign companies seeking to list domestically may be getting ahead of themselves.”

Once the State Council or CSRC has clarified this provision, will the doors be open for HSBC and companies with similar aims? Unfortunately it seems there may be one more legal hurdle to overcome: the fact that the Securities Law says a company offering shares publically in China must conform to the PRC Company Law (中華人民共和國公司法). This law applies to companies registered in China.

“If you look at the intention of the legislator, I believe in their mind they were only thinking of companies incorporated in China,” says Ji Zou, a Shanghai-based partner of Allen & Overy. “They need to be joint-stock companies – this is a specific concept under the Company Law, so they should be a company incorporated in China.”

This implies that foreign-registered companies are not able to list (Jing and Wang explain this in more detail – see box: The challenge of the Company Law for more details).

More work needed
To summarise, before any foreign-incorporated firm, including red-chips (PRC companies listed in Hong Kong), can list in mainland China:

• the State Council must launch parallel rules governing the issue and trading of foreign shares in the form of depository receipts, relying on Article 2 of the Securities Law (prescription of other securities);
• the CSRC must decide disclosure requirements with China stock exchanges and national stock clearance and settlement companies;
• foreign exchange requirements have to be clarified (decisions will need to made as to which currency shares are denominated in because, under present rules, if shares are denominated in US dollars, those wanting to subscribe would need to get permission to invest in a foreign currency); and
• Chinese regulators will need to enter into treaties or memoranda of understanding with foreign securities regulators and stock exchanges to allow the deposit of foreign shares in China for trading.

On the last point, Zou says she is not aware of any “hard requirements” for the regulator to enter into treaties. “But for the CSRC to feel comfortable with a foreign company, they need to feel comfortable with the jurisdiction where the company is incorporated, and listed if the company is already listed elsewhere,” she says. “It's a risk control issue, and consistent with the historical approach taken by China when it opened the gate to foreign investment.”

The CSRC has in fact entered into 39 treaties with foreign authorities since 1993. These include memoranda of understanding with the Hong Kong Securities and Futures Commission, the US Securities and Exchange Commission, the Monetary Authority of Singapore, the Australian Securities Commission and the Ministry of Finance of Japan.

Much is already in place – but there is obviously much more to be done, particularly when it comes to clarifying legal rules. Encouragingly, most lawyers do not see this as a big hurdle: the key, they say, is government will, and that the regulators are ready and willing to comply.

“If the Chinese government wants to encourage the listing of foreign companies in China,” says Zou, “they will take actions to facilitate such listing by putting forward new legislation or amending existing rules, for example. If the government is in support, they can make it happen.”

Unfortunately, it is exactly this issue of dependence on government which worries some foreign investors: “Chinese regulators are notoriously fickle and cautious when it comes to rolling out new policy initiatives,” the Financial Times said recently.

While that view may be seen as a little extreme by many lawyers working in China, it is true that policies tend to be rolled out gradually. Antony Dapiran, a Freshfields Bruckhaus Deringer partner, describes this as a pragmatic approach, with the regulators using an iterative process.

“The way that new policies tend to happen in China is that there's a pilot case or two that are allowed, then they might introduce tentative provisions … and then finally issue the real rules,” he explains.

Given the number of comments from officials quoted in Chinese state-sanctioned media, it seems that the government and regulators do have the will to see their plan through.

“There are reasons why people are becoming more optimistic,” says Zou. “The Gem board [a new board in Shenzhen] is functioning now, and the first batch of companies has submitted applications.”

The present situation appears hopeful. But companies wanting to list in Shanghai should not build their hopes up too quickly. It feels like we have been here before: the situation in September 2009 is remarkably similar to that in April 2008. In an alert published by Allen & Overy at that time, lawyers wrote that the PRC government was “actively exploring ways to further open up its stock market by allowing companies incorporated overseas to be listed in the domestic market”. They also noted the possible launch of an international board at the Shanghai Stock Exchange, and the possible introduction of China Depositary Receipts in Shanghai in co-operation with London's exchange. The same alert discussed the probable impact of the move on red-chip companies (see box: Red-chips bring private equity opportunities).

Patience will be the key as the authorities slowly make information available over the next few months.

“We're all waiting to see what will happen – even those close to the developments are not quite sure how and when this will happen,” says Yeung.

Red-chips bring private equity opportunities
The opening up of China's capital markets to foreign-registered companies will present private equity houses with a new exit strategy, through listing in so-called red-chip companies.

Red-chips (large, usually state-owned, enterprises which are incorporated outside mainland China and listed in Hong Kong), along with other foreign-incorporated companies, are not allowed to list in mainland China. But if this situation changes, many think that it will be the red-chips will be given priority.

“If there's any allowance of foreign companies, then red-chips will probably be first batch,” says Allen & Overy Shanghai partner Ji Zou. And if this is the case, private equity investors will get access to some attractive assets.

“Private equity investors generally prefer to invest in an offshore company which has a more flexible capital structure than a domestic PRC company,” says Antony Dapiran, a Freshfields Bruckhaus Deringer partner. “If these companies
were also permitted to list in the mainland, this would open up an additional and attractive exit route for private equity investors.”

According to Caijing magazine, China Mobile, one of the best-known red-chips, recently appointed China International Capital Corp (CICC) to arrange sales of A-shares. Soon after that, the vice-mayor of Shanghai was reported by the Shanghai Daily as supporting the 2010 launch of a new international board. China Mobile plans to list in Shanghai next year, and if it is successful, companies such as CNOOC and China Unicom may follow suit.

“These companies will also appreciate the ability to be listed in their 'home market', attracting domestic investors and further raising their profile,” says Dapiran.

Regulators in mainland China have been pursuing a policy of raising the standard of the market by making more high-quality companies available to domestic investors, according to Dapiran, and encouraging the listing of red-chips is “consistent with the theme”.

Earlier plans to allow red-chips to issue China Depositary Receipts – instruments which foreign companies can use to allow Chinese investors to own their stock – were put on hold last year after the onset of the global financial crisis.