Monday, November 5, 2012
Caixin and other media report that the China Securities Regulatory Commission plans to drop its requirement that Chinese companies listing in Hong Kong meet certain size criteria: 400 million yuan in net assets, an offering size of US$50 million, and 60 million yuan in profits in the year before listing. This is in line with what I've heard is the CSRC's intention to move away from merit regulation and toward US-style disclosure regulation.
It's not clear to me why it was ever the CSRC's business to worry about overseas listings by Chinese companies. The shareholder-protection concerns are surely the business of the overseas jurisdictions, not China, and the foreign-ownership concerns, if any, would apply to all Chinese companies, not just ones with stock market listings, and so should be handled by the Ministry of Commerce. In any case, however, this is a step forward in Chinese business law and, I hope, another blow to the cult of bigness that dominates official thinking about corporate law.
It's also good news for the Chinese economy. To the extent that economic activity requires organizations like corporations to undertake it, anything that makes corporations run better is good for economic activity. And generally, flexibility in corporate organizational law is good. (I'll just leave it at that, since this is not the place for an extended discussion of the proper balance between mandatory and default rules in corporate law.) My pet theory of barriers to innovation in China is that problems with intellectual property law and enforcement are only part of the story. Another part is that problems with corporate organizational law - essentially, its rigidity, obsession with bigness, and supreme confidence that legislators know what's good for business better than business people do - prevent entrepreneurs from designing the type of business entity that can get their ideas funded. Thus, anything that removes barriers to small businesses getting funding - and lowering the threshold to listing in Hong Kong does that - is good.
I think it's problems in Chinese corporate law that explain why we still see round-tripping of investment (Chinese money going offshore and then returning to China dressed up as foreign investment) even though the regime of special preferences for foreign investors has more or less disappeared. People aren't going offshore to take advantage of tax preferences. They're going offshore to take advantage of foreign organizational law, which allows them to do things that Chinese corporate law doesn't. Think about the complex set of claims on a pre-IPO start-up in the US. To get funding from different kinds of people with different goals and different risk preferences, that company will probably have had to cook up different classes of preferred and common stock, with different conversion rights, rights to board seats, rights to profits, veto rights over particular corporate actions, etc. That kind of structuring is completely impossible under Chinese corporate law, which (for example) doesn't even provide for preferred stock.
Allowing smaller Chinese companies to list in Hong Kong does not, of course, reduce any of the rigidity problems in Chinese corporate law, but it's a step forward toward more flexibility in general.