In the news: Alibaba confirms US IPO, Twitter CEO visits China, the CSRC punishes law firms and Zhejiang Xingrun defaults

Alibaba ditches HK for US IPO

Alibaba announced on Sunday it has started filing for its US IPO. This marks the second largest internet listing ever, expected to exceed Facebook's US$16 billion offering in 2012. After year-long discussions with the HKSE and SFC, Alibaba grew impatient and decided to abandon Hong Kong as its proposed shareholder structure violated the city's one-share-one-vote principle. Alibaba's proposal consisted of a group of top managers and founders to nominate and control the board while holding 13% of the company's shares, which the NYSE and Nasdaq approved last October. The Hong Kong regulators initiated a review of its listing rules to accommodate more flexible structures, but any changes would take months. In addition to this delay, pressure from rivals rushing to tap the tech-friendly US market also led to Alibaba's final decision.

Sources:
CNBC
Reuters

The decision can be seen as a hugely missed opportunity for Hong Kong's capital markets in terms of lost prestige, fees, trading volumes and diversification of its stocks away from Greater China financial and property companies. The addition of a large, dynamic tech company would have bolstered the city's status as a global financial center. The HKSE is known for its rules-based, prescriptive approach and stricter listing requirements, and is perhaps worthy of praise for sticking to its values of investor protection. However, HKEx and the SFC have been kicking back and forth drafts on shareholder rule changes and reform initiatives to attract new types of IPOs. Meanwhile, the high performance of stocks of US tech giants like Facebook and Google on tech-heavy Nasdaq has inspired smaller Chinese internet companies such as JD.com and Weibo to look into their own US listings. The race is on.

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Twitter CEO visits China

Landing in Shanghai next Monday, Dick Costolo will meet Shanghai government officials, academics and students in his first trip to China, a buzzing and lucrative market with 600 million internet users. Twitter has been blocked nationwide by Chinese censors since 2009. The CEO will also meet with the representatives of the Free Trade Zone, a unique pilot scheme with relaxed rules governing foreign exchange and investment, although officials have denied internet restrictions and censorship will be loosened as well. Chinese government intervention has impeded major internet companies like Google and Yahoo, with Google even pulling out of the country in 2010. Twitter has rejected the possibility of opening an office in China, since it would subject the company to Chinese law.

Sources:
Reuters
Quartz

Social media platforms and blogs, such as Sina's Weibo, are increasingly subject to intense scrutiny by the government under President Xi's campaign to clamp down on dissident voices online. Costolo announced last year that while he would love to be able to run Twitter as Twitter in China, he has no intention to sacrifice the principles of the platform and user communication. LinkedIn recently unveiled a Chinese language site and faced little backlash despite agreeing to be censored by the government. Twitter manages a decent revenue stream from China through its subsidiary MoPub, a mobile-app ad-server with many small Chinese app developers as customers. However, it is struggling to add new users and it appears to be considering a push into e-commerce. Costolo's impression and opinion of China's innovative internet market, which has grown massively in size and activity, will be worth following.

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Chinese law firms fined over IPO due diligence

Jingtian & Gongcheng was fined US$50,000 by the CSRC over its failure to perform adequate due diligence on an IPO. After receiving a penalty notice one month ago, the firm was ordered to disgorge US$25,000 in legal fees and the individual lawyers involved in the offering were each fined US$16,700. However, the penalty notice lifted the firm's four-month suspension from submitting IPO applications. The October suspension resulted from concerns over the firm's representation of Tianfon Energy-saving Panel Science and Technology, whose Shenzhen IPO was canceled after officials' random audit checks disclosed illicit discrepancies. Two other major law firms were similarly punished recently: Dacheng Law Offices and JunZeJun Law Offices. As of now Jingtian & Gongcheng claims that is has resumed its practice advising on Shanghai and Shenzhen listings.

Source:
The American Lawyer

Though some Chinese lawyers expect the CSRC's actions to prompt firms' implementation of more stringent internal controls, many have also criticised the crackdown as unjustly blaming lawyers for a flawed system. These events took place while China welcomed back IPOs, showing that the CSRC's effort to liberalise the stock market in its November Opinion backfired. Regardless of whether the issuers needed more control or the laws needed more clarity, the reform was counterproductive. The CSRC then issued Measures early this year to conduct random inspections on the IPO process – increased supervision is a good sign. When China's stock market matures enough to stop being babysat by regulators is dependent on real change to bad habits.

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Chinese real estate developer's Rmb3.5 billion collapse

Zhejiang Xingrun Real Estate's largest shareholder and his son were detained for illegal fundraising as the real estate developer was unable to repay creditors that include more than 15 banks, including CCB, which holds over Rmb1 billion of its debt. The collapse of the company has come only two weeks after the first domestic bond default (Chaori Solar). Stocks and bonds issued by Chinese real estate companies slumped after news of Zhejiang Xingrun's collapse due to rising concerns of defaults, economic slowdown and the government withholding on lending. The local government of Fenghua, where the company is based, is said to be in discussions with banks on how to repay the debt.

Sources:
Bloomberg Businessweek
The International Business Times

The need to properly assess risk and policy on loans can no longer be ignored. Over-dependence on state bank loans creates risks in the financial industry and makes funding for smaller firms virtually impossible. The PBOC has said it didn't participate in an emergency meeting this week on Zhejiang Xingrun's collapse and that it isn't involved in dealing with risks from the failure. China's property sector is significantly overinvested despite the slowing price increases, leading developers to turn to shadow banking. In this case, the company took deposits from individuals who were offered annual interest rates of between 18% and 36%. Tight liquidity pressures and slow transaction volumes only aggravate the problem, especially for developers in mid-tier cities with limited access to financing. The government has made it clear it will not actively deal with defaults of this nature – hopefully its economic reform to expand financing opportunities from state to private sectors offers a long-term solution.

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