With stock prices soaring over the past several months, China's booming A-share markets have attracted interest from many investors. Many Chinese technology companies are considering reforming their VIE structures to get listed on the domestic markets. As to the Chinese technology companies that are listed overseas, the securities regulator needs to loosen rules to attract more of them to the mainland markets. With more high-profile and high-quality technology companies getting listed on the domestic markets, it would be beneficial for the domestic capital markets as a whole.

Photo: CFP

With the booming development of Chinese mainland stock markets, particularly the fast-growing ChiNext board, many Internet companies are considering altering their variable interest entity (VIE) structures to get listed on domestic capital markets, according to recent media reports.

"But for those technology companies that have got listed overseas, Chinese securities regulator should consider loosening restrictions to attract them to the mainland markets," Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times Monday.

VIE structures are widely used by Chinese technology companies such as Internet giants Alibaba Group, Baidu Inc and Tencent Holdings. The VIE structure was developed to enable Chinese companies to circumvent domestic restrictions and access overseas capital markets.

While some domestic technology companies are still considering whether to get listed overseas or on the mainland, the shares of some domestically listed companies have outperformed the markets.

Beijing Baofeng Technology Co, a Beijing-based Internet company, is one of the technology companies that has adjusted its VIE structure. It went public on the Shenzhen Stock Exchange on March 24. The company is principally engaged in integrated video services for video users and Internet advertising information services for commercial customers. Its stock has risen by the 10 percent daily limit on 39 trading days since it went public.

Still, Dong urges investors to remain cautious.

"Baofeng is a unique example that cannot represent the entire market," he said.

Domestic listing

The securities regulator's shift from an approval-based system to a registration-based one for new listings is expected to simplify the IPO process and encourage more companies to get listed on the Chinese mainland, according to a research note sent to the Global Times by PricewaterhouseCoopers (PwC) Thursday.

In the first quarter of 2015, eight Chinese technology companies chose to get listed domestically.

Technology companies have higher valuations on domestic markets than on overseas markets.

"Over the long term, more Chinese technology companies will go public on the domestic capital markets," Gao Jianbin, the technology industry leader at PwC China, told the Global Times Monday.

"In fact, many technology companies have regretted going public on the US markets instead of the Chinese mainland markets," Wang Ran, founder of China eCapital Corp, a private investment bank in China, said in a report published on financial news portal caixin.com on May 18.

Still, many companies question how long Chinese mainland stock markets can keep booming.

There are several factors supporting the development of stock markets in China. China's economic growth model is changing, which is driven by domestic consumption from the previous governmental investment.

In that case, the Chinese government is expected to enact regulations and laws to encourage the capital markets to boost the development of innovative or potentially fast-growing companies, Dong said.

Also, Premier Li Keqiang unveiled an "Internet Plus" initiative in his government work report on March 5. The central government vowed to integrate mobile Internet, big data and the Internet of Things with modern manufacturing industry so as to encourage the sound development of Internet businesses.

"It is possible the central government will launch more supportive policies for those technology companies, including Internet companies, to go public on China's domestic capital markets," Dong said.

Regulation adjustment

The China Securities Regulatory Commission (CSRC) has been working to streamline the current IPO process.

CSRC Chairman Xiao Gang said at the Asian Financial Forum in Hong Kong in January that China will continue to simplify procedures for companies planning to go public on the domestic stock markets, including the abolition of profit-making requirements.

Compared with overseas capital markets, China's stock markets have higher requirements for profit-making and equity structures, Dong said.

Also, a draft amendment to China's Securities Law was submitted to the Standing Committee of the National People's Congress, China's top legislature, for consideration in April. The law calls for the replacement of the current approval-based system for IPOs with a registration-based system, according to a report from the Xinhua News Agency on April 20.

The revised Securities Law is expected to improve the current IPO mechanism.

"But it will still take time to make the revised Securities Law effective," Gao from PwC said.

Chinese regulators might provide more policies to allow innovative and potentially fast-growing companies to get listed on the domestic markets, Dong said.

Challenges

For those technology companies with VIE structures that haven't gone public overseas, they need to alter their VIE structures if they want to get listed domestically, Dong said.

But it's hard to make it happen in a short time due to legal barriers and taxation policies, which are quite complicated, Gao said.

These companies can also consider first getting listed on the New Third Board, and then figure out a way to get into the A-share markets, possibly through mergers and acquisitions, Dong said.

In January 2014, China launched the New Third Board, an over-the-counter (OTC) market that offers a national share transfer system for micro and small enterprises.

The new board is attractive to many companies because it has fewer requirements than ChiNext and the main board.

It would be beneficial for domestic capital markets as a whole to have more high-quality and high-profile companies get listed, Gao said.

But investors need to be aware that most technology companies are high-growth, and therefore high-risk, investments, Gao said.

"Normally most investors in mature markets are institutional investors with a lot of experience, so they know how to invest in technology companies," Gao said. "But most Chinese investors are individuals with less experience and expertise, so they face more challenges when investing in technology companies."

It will take time for the domestic capital markets to gradually improve, Gao noted.
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