BEIJING, April 18 -- As the country's stock market has been sluggish for quite a while, many Chinese enterprises have been rushing to get listed on overseas stock markets.

    Last year the amount of capital pooled by Chinese enterprises through initial public offerings (IPOs) overseas was three times the amount on the Chinese mainland.

    It seems that overseas stock exchanges have become a major way to finance Chinese businesses while the mainland one has been "marginalized" to some extent.

    It is not rare around the world for an economy to rely heavily on overseas financing, but such a situation usually happens in economies with a small domestic stock market and a heavy reliance on foreign trade.

    For these economies, it is an economical and realistic choice to make full use of the international capital market which is much more mature than their domestic ones.

    Yet so many domestic enterprises choosing to get listed overseas is far from ideal for an emerging capital market with a huge demand for business financing, such as China.

    In the past few years the Hong Kong stock market, for example, has witnessed three waves of public offerings by mainland businesses.

    The first wave occurred before the Asian financial crisis. The year 1997 saw 27 mainland company IPOs with a total amount of HK$71.4 billion (US$9.15 billion).

    The second wave came in 2000 with eight listings, pooling HK$96.5 billion (US$12.4 billion).

    In 2004, there were 24 public offerings by mainland enterprises with a total of HK$55.3 billion (US$7.1 billion). The latest wave is ongoing.

    A comparison between the three Hong Kong waves and the situation in the mainland stock exchanges during the same period indicates that the inability of listed companies on the mainland to get enough capital is an important factor pushing them to the overseas capital markets.

    As a matter of fact, mainland businesses' targets are spreading from Hong Kong to other stock markets such as New York and Singapore.

    Furthermore, since 2000 many medium and small firms are following in the footsteps of large companies and also being listed overseas.

    The enthusiasm of Chinese businesses to get listed overseas reflects the disadvantages of the current mechanism governing stock exchanges and public offerings on the mainland.

    There are ways to limit the overseas offerings with administrative action. But such interference only prevents businesses from getting the cash they need.

    When a company makes a decision on their public offerings, they choose according to their calculations of the possible cost and return.

    The average price earning ratio Chinese businesses get from overseas listings is much lower than what they get from mainland markets.

    The price earning ratio on the main board of Hong Kong for mainland listed companies is 30 per cent lower than the mainland stock market. The ratio on the second board of Hong Kong for mainland companies is around 45 per cent lower than the mainland.

    The ratio in Singapore is even lower.

    Despite the higher price earning ratio the listed companies may see on the mainland, the companies still favour overseas markets.

    The reason is that to get listed in Chinese stock exchanges takes longer, which incurs many uncertainties. And companies will have difficulty getting more financing.

    In contrast, when the companies go public in a mature market, they can finish the process in a shorter time. It is also easier for them to get further financing from a market that can withstand more ups and downs.

    As for the impact on the mainland capital market posed by companies' overseas listing, different groups have different opinions.

    For enterprises already listed or trying to get listed overseas , it is only a natural choice because the overseas capital markets offer the money they need and help settle problems in their corporate governance.

    But for Chinese investment banks and securities houses, they view the situation as one which deprives them of huge business opportunities. If it carries on, China will have little chance to nurture world-leading investment banks or fund management companies.

    Therefore, the mainland stock markets have been marginalized with so many companies going public overseas.

    To change this, the first problem to tackle is the huge percentage of non-tradable shares in listed companies. Because of their existence, the market actually favours listed companies rather than investors.

    At the same time, a multiple-layered capital market should be established to satisfy the demand for direct financing. It is impossible for the two stock exchanges in Shenzhen and Shanghai to satisfy all the financing needs of businesses around the country.

    Other measures should also be taken to improve the efficiency and transparency of the listing procedures and the credibility of the market.

    As a matter of fact, competition between overseas and domestic exchanges for IPOs is decided by the efficiency of the capital market. By far, the mainland one has shown itself to be less competent.

    To encourage more outstanding businesses to offer their shares on the mainland stock exchange, the ultimate solution is to improve the overall efficiency of the capital market.

(Source: China Daily)