written_testimonies of Timothy P. Halter
Before the
U.S. – China Economic and Security Review Commission
“China’s Presence in the Global Capital Markets”
April 16, 2004
I would first like to that you for the opportunity to speak this morning to the commission. My name is Tim Halter and I am the Managing Director of the USC China Index, which is an index that tracks the performance of Chinese companies that are publicly traded in the US capital markets. I am also the President of Halter Financial Group, Inc., which is a private equity and consulting firm, which has a particular focus on Chinese investments. In addition to our US operations we have an office in Shanghai with seven employees.
I read the July 2002 Report To Congress of the China Security Review Commission and noted with interest that the information provided and discussed regarding Chinese companies focused primarily on Chinese companies whose stock is listed in the U.S. as American Depository Receipts (ADRs). Although the issues raised in the report regarding these companies are on point, it is important to note that these do not represent all of the Chinese companies who trade publicly in the U.S. The USX China Index tracks the performance of companies who generate the majority of their revenue from operations in the PRC whose shares are listed on the AMEX, NASDAQ or the NYSE and have a market capitalization of at least $50 million U.S. At the present time there are 35 companies that meet these criteria and are included in the Index. Of these 35, 22 are ADRs and 13 are direct listings. In addition, we have identified 36, other Chinese public companies listed in the U.S. that are not currently included in our index and of these only 3 are ADRs and 33 are direct listings. Therefore, I believe that it would be important for the Commission to draw a distinction between ADRs and direct listings in their analysis to gain a more accurate understanding of the whole picture of Chinese companies and their participation in the U.S. capital markets.
The definition of what constitutes a “Chinese company” is open to interpretation. Is it defined by certain percentages of revenue generated in China or goods or services produced in China or ownership by Chinese nationals or the Chinese government? What about a company that is domiciled in the U.S. with all of its operations resulting from a majority ownership of joint ventures within the PRC? A company can have its operations in one country, be domiciled in another country and have shareholders from many other countries. If any of these items involves China, does that make it a Chinese company?
From a reporting perspective there are three categories of Chinese companies trading in the U.S. markets. The first is the ADR which is a company that trades its stock publicly on a foreign exchange and in addition to the reporting requirements required by the exchange on which it is listed, it is also required to file with the US SEC as a foreign filer. The second category is the Chinese company that is also a foreign filer with the U.S. SEC, but is listed only on the US markets. We have identified 14 of these companies traded in the U.S. Foreign filers are subject to reduced reporting requirements with the SEC and the exchanges as compared to domestic US filers. The third category is the Chinese company whose operations are held in a US domiciled corporate entity. We have identified 31 of these companies that are traded in the US capital markets. This type of Chinese company is subject to the exact same reporting requirements with the SEC as all other U.S. public companies reporting under the Securities and Exchange Act of 1934. It must have audited financial statements in accordance with U.S. GAAP from an SEC approved auditor and they are also subject to the requirements of the Sarbanes-Oxley Act of 2002 including the expanded corporate governance requirements, certifications and internal control requirements. In addition to SEC filing requirements they are subject to the newly expanded NASDAQ, AMEX or NYSE requirements to obtain a listing.
Although to date, the great majority of capital raised for Chinese companies in the US markets has been for large State Owned Enterprises in IPOs, we see an increasing interest by smaller private owned Chinese companies seeking to access the US capital markets. Most of these privately owned Chinese companies are raising relatively small amounts of capital here. Since 2001, there have been 20 non-SOE Chinese companies that have raised a combined $ 800 million in private placements in the US capital markets. Note that this money was raised, not in IPOs, but in private placements subsequent to the companies becoming publicly traded here. It is an active and growing strategy in China for Chinese companies to become public in the US, not through an IPO, but by merging with an existing, dormant, US public company and then pursing a capital raise through the private placement markets. I would like to point out, because this process entails using a U.S. domiciled public entity, these companies are subject to the full the reporting requirements of the SEC under the 34 Act. We are of the opinion that the majority of the Chinese companies that will enter the US capital markets over the next several years will do so using US domiciled entities. However, these will mostly be smaller companies and in terms of capital raising these companies will be relatively insignificant when compared to the large SOE IPOs coming in future years.
I would like to speak for a moment about the increased demand by US investors in Chinese stocks. The USX China Index recently completed a liquidity analysis report that showed that in January 2003, one billion dollars worth of volume of the USX China Index required 108 trading days. By January 2004, one billion worth of volume required only 6 trading days. This is indicative of the demand by the U.S. investor for Chinese stocks. Last year the USX China Index was up 104%. Obviously, Chinese companies are well aware of how well Chinese stocks are performing in the U.S. Historically, many Chinese companies seeking to “go public abroad” had only considered Hong Kong because of its proximity and their familiarity with its system. Today, an increasing number of Chinese companies are now considering the US markets as their capital market of choice. It is widely accepted that the U.S. capital markets are the best in the world. In addition to raising capital there is prestige and credibility in a US listing. It is also understood by Chinese companies that our standards are high and it is not an easy task to comply with the requirements to be a public company in the U.S. Nonetheless we are seeing an increasing number of Chinese companies willing to attempt to meet these standards for the benefits that a US listing brings.
Again, I would like to thank the commission for the opportunity to speak to you this morning and at this point I would be happy to answer any questions that you may have.