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| Feature: Eastern Promise |
Perilous Paths to China
Rebecca Fannin
09/01/2005
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Taking
Stocks
Chinese corporations that sell
securities
abroad have to pass muster with
local regulators in the
countries where they list. However, investors should be
particularly
cautious, even when investing in Chinese
companies listing in the
U.S.
or Europe. Sometimes what is
listed as an American Depository Receipt or
Global Depository Receipt
is actually the stock of a holding company
that has a
contractual relationship with a Chinese company, meaning it
is
not necessarily a
pure play on the performance of the
company.
Chinese companies nominally
adhere to
International Accounting Standards, the rules developed by the
London-based International Accounting Standards Board that are
used in
many
European countries. However, whether government
or privately
owned, they are
notorious for accounting
irregularities. Also, the
domestic market’s efficiency
and
fairness is hobbled by widespread
insider trading, though technically
this
is illegal.
Many
companies do list both at home
and abroad, and their stock
price can
vary from one exchange
to another at any given moment. The main
instruments used by
Chinese corporations to raise equity capital
are:
ADRs: American Depository Receipts,
traded on the NYSE;
GDRs: Global Depository
Receipts,
traded largely on the London Stock
Exchange;
Red
Chips: Hong
Kong–incorporated entities doing business in
China;
A
Shares: Renminbi-denominated shares on the
Shanghai and
Shenzhen stock
exchanges, open only to domestic traders
and a
very select list of foreign
institutions;
B
Shares: Foreign currency-denominated shares on the Shanghai
and
Shenzhen
stock exchanges, open to foreign
traders;
H
Shares: Stocks of companies
incorporated in China and listed on the
Hong
Kong Stock
Exchange and foreign exchanges, such as Singapore.
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