Buy Houses Please But Don't List Your Chinese Companies in Canada

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As a nation we have benefited from recent Chinese immigration.  We accept that their purchase of houses, vehicles, and services helps our economy.  We should be as open when it comes to listing their companies here.  New standards should reinforce the corporate governance standards that are already in place, not create special standards for one particular class of company.


After five years working with Chinese issuers listed in Canada, and a stint living in Shanghai doing due diligence projects, the trip back to Vancouver in June 2011 was ominous.  The Globe and Mail  provided by Air Canada was headlined “Sino-Forest board rattled by short-report” After several years of growth Chinese companies listed in North America went into freefall – some by guilt, many just by guilt by association.


In December 2012, the TSX released a Consultation Paper on Emerging Market Issuers, clearly targeted at Chinese issuers.  Since then, silence………..…….My fear is that there will be a regulatory overreaction.  Consultation papers tend to telegraph the intended result, and it looks like an entirely new set of regulations are being polished off.  Draconian new regulations will shut the door on new listings.  Selfishly, this hurts my consultancy, but more importantly, it would hurt Canada’s ability to attract the listings of high-growth companies from China and provide the accounting, legal, underwriting and management services they require.


Perhaps it won’t matter.  While Canadians fret that our markets are overly concentrated in the resource, energy and financial sectors, in the investment community the chill to “Chinaco” is very apparent.  There is a predictable silence in Toronto or Vancouver when I reveal that a company seeking financing has significant operations in China.  A current client, having survived an excruciatingly long regulatory review, and the dismissal of a class action suit, will have to seek financing in the US or Asia, as the gloom continues.  The same appetite for risk that makes us champion financiers in the energy and resource sectors has vanished for the Chinese sector.  For now.


This won’t last forever.   Already in the US it is another story. The NASDAQ Golden Dragon index of Chinese companies is up 50% in the past 12 months, capturing back the 2011 and 2012 losses.  Warts and all, investors couldn’t ignore China sector stocks forever. The numbers in all categories don’t need to be rehashed. Simply, China’s economy is on route to being the world’s largest. Most of the revenue growth in the S&P 500 is from overseas, the majority of that from China, and investors looked again for China ‘pure plays.’ Eventually the same realization will come from Canadians, who will put Sino-Forest into the same category as Bre-X, Nortel, Blackberry, etc. Lessons to be remembered, but risk is where the reward is.


But there hasn’t been overly tough new regulations in the US, the industry is simply doing its job with regard to due diligence, which for a while during the ‘great enthusiasm’ wasn’t the case as investment banks, brokerages, auditors, and even stock exchanges competed to bring issues to the market to satisfy the demand and basics were overlooked. Times are changing. Chinese companies are now scrutinized to a level that is far higher than a ‘domestic’ company by financial industry, which is how it should be.  The Canadian financial industry is no less capable of performing the same level of scrutiny, using existing regulations   But it won’t get the chance, if the listings flock to the Nasdaq et al, due to roadblocks placed by Canadian regulators.


The Chinese do indeed have a proverb “Muddy waters make it easy to catch fish”, they also have the proverb, ”When the wind of change blows, some build walls some build windmills.” Let’s not build walls against Chinaco.



Stuart Wooldridge lives and works in Vancouver, and is hoping to one day get his calls returned.