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February 16, 2017

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Poverty pockets whisk IPOs to front of the line

SEVERAL times in recent months, a lawyer who wants to be identified only as Jack flies from Shenzhen to Yanchuan, a small, rural county in northern Shaanxi Province, to talk with local government officials about registering a company there and preparing the necessary documents.

The county, which is under the jurisdiction of the city of Yan’an, is a poverty-stricken area typical of regions along the treeless loess plateau above the Yellow River.

What attracted Jack to this somewhat bleak backwater are changes to China’s initial public offering procedures that encourage unlisted companies in impoverished areas to sell shares to the public as an impetus to local economic development.

Starting last September, proposals published by the China Securities Regulatory Commission allow companies registered in 592 “impoverished regions” to skirt the long list of some 618 companies currently queued up waiting for IPOs on the Shanghai and Shenzhen stock markets.

Jack represents a Shenzhen-based mobile game company that wants to get onto the fast track instead of waiting up to three years for a listing and having to meet strict profit and revenue requirements.

“We can’t promise that the next game to be developed will create high growth in revenue and profit two years down the line,” Jack said. “That is like gambling.”

So Jack’s company is simply changing its corporate registration address to Yanchuan, with the hope of being able to list on the Shenzhen exchange next year. Jack said he was told to keep the case “low-profile,” lest the subterfuge prove controversial.

But, of course, “back doors” always attract attention.

A Shanghai-based online financial firm told Shanghai Daily recently that it is hoping for an IPO in 2017. It declined to reveal details of the process, but it has been investing heavily in an impoverished area of Guizhou Province.

None of the companies involved is willing to be identified by name.

The policy of fast-tracking IPOs from poor areas was among a group of policies aimed at breaking the logjam of companies waiting to list. Since taking office a year ago, Liu Shiyu, chairman of the securities regulator, has vowed to clear the backlog.

However, only a handful of the 618 companies on the waiting list are eligible for the fast-track channel provided to the nation’s poorest regions.

That channel is politically motivated more than market-oriented. A Politburo meeting in November unveiled a policy to move the last 50 million of poor rural Chinese out of that category by 2020.

“Legal Weekly,” a newspaper owned by China’s Committee of Political and Legal Affairs, published an article in 2012 that reported a maximum per-capital annual income of 2,300 yuan (US$335) in impoverished counties. That was less than 9 percent of the average annual income in urban areas.

“Of course, we realize that the regulator has to push forward a political agenda to achieve a bigger goal,” said Steven Sun, head of Hong Kong and China equity research at HSBC. “But how much can you expect to alleviate poverty by issuing stocks?”

Indeed, the policy seems to be generating more regulatory sleight-of-hand that genuine poverty relief. The regulator has placed some conditions on companies in poor regions jumping the queue, including a requirement that those registered in an impoverished county have paid at least 20 million yuan in local taxes in the past year.

It’s not just companies seeking registrations in poor regions that appear to be trying to circumvent the intent of the new policy. Some regions themselves are actively soliciting new registrations.

In one online group of WeChat viewed by Shanghai Daily, the finance office staff from Zhangjiakou in Hebei Province was actively wooing potential companies to change their registration addresses to Hebei.

Some companies joining in that online discussion said they preferred Tibet because of more beneficial tax policies, while others said they are considering buying shell companies in impoverished counties.

By December 14, 24 companies listed on China’s over-the-counter stock market, known as the “new third board,” announced plans to change their registration addresses to impoverished areas, according to calculations by Shanghai Daily.

The securities regulator is displeased with such “regulatory arbitrage” and has called for more transparent disclosure on IPO applications and documents for companies seeking the fast-track channel, said Deng Ge, spokesman for the regulator.

Commission Chairman Liu said China plans to speed up IPO approvals within two or three years as part of an overhaul that aims to have listings ultimately driven by the market and not by regulators.

“At the end of the day, the regulator won’t be the one giving approvals to whatever companies apply through the channel,” said Selina Lin, a senior manager at Ernest & Young who oversees mainland public offerings.


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