Reuters

Venture Fundraising in Yuan Soars as Investors Target Chinese Tech Firms — The New York Times

 

HONG KONG (Reuters) – China-focused venture capital funds are increasing their bets on local technology companies and a further opening of Chinese domestic capital markets, raising money in the yuan at the fastest pace in five years.

Fund managers have raised 95.8 billion yuan ($14.54 billion) this year through late September in funds denominated in the Chinese currency, which is also known as the renminbi, compared with 56.7 billion yuan in all of 2016. That puts 2017 on pace to be the biggest year since 2012, when 145.8 billion yuan was raised, according to data provider Preqin.

There are currently 78 funds looking to raise as much as another 1.15 trillion yuan over the next couple of years, Preqin said, most of it coming from mammoth-sized state-owned entities and so-called government guidance funds, which seek to foster domestic innovation in different industries from advanced engineering and robotics to biotechnology and clean energy.

 Those include the 350 billion yuan sought by the China Structural Reform Fund, 200 billion yuan targeted by the China State-Owned Capital Venture Investment Fund and a proposed 150 billion yuan for the state-owned Enterprise National Innovation Fund.

The enormous size of the fundraising ambitions of the Chinese state-backed funds means it may take some time before they reach their final goals. The China Structural Reform Fund, which was launched in 2016, has raised 20 percent of its registered capital and its president said in an interview with Caixin Global that funding will be completed by the end of 2018.

“We’re at the all-time highest of capital-raising high water marks, with a tsunami of government-backed entities seeding incubators, VC funds, locally, provincially, nationally,” said Peter Fuhrman, CEO of China-focused investment bank China First Capital. “China has a lot of money in its government apparatus. It wants to seed innovation and entrepreneurship and this is how it’s doing it.”

The surge contrasts with the slowdown in seed financing for start ups in the United States, which is down for the past two years. It also compares with flat growth expected for U.S. venture capital fundraising in 2017, according to estimates from the National Venture Capital Association (NVCA).

CATCHING ENTREPRENEURS

Firms such as Lightspeed China Partners, Morningside Venture Capital, GGV Capital and investment and merchant bank Ion Pacific that previously only had U.S. dollar funds are launching their first funds in yuan. Others like Hillhouse Capital, Sequoia Capital China and China Renaissance that have raised funds in both currencies are adding to their yuan cash pile with new funds.

Key to those firms is to not lose potential investment opportunities in sectors closed to foreign investors or miss out on investing with the Chinese entrepreneurs who now want to list their companies locally instead of in the United States.

“Catching the right entrepreneurs in the ecosystem is our number one priority, so currencies to us are just tools, those are the tools that I need to catch these entrepreneurs,” said Harry Man, partner at Matrix Partners China, which has funds in both currencies. “That’s why if you don’t have RMB in your hand, ultimately you’ll be missing 50 percent of the deals. Then you’ll be forced to raise an RMB fund and that’s why everybody is doing it.”

Sequoia Capital China, which backed top Chinese technology firms such as Alibaba Group (BABA.N), is looking to raise at least 10 billion yuan for a new fund, while Hillhouse Capital, an early investor in companies including Tencent Holdings Ltd (0700.HK), Baidu Inc (BIDU.O) and JD.com Inc (JD.O), is targeting about 8 billion yuan for its fund, sources told Reuters.

The investment management arm of securities firm China Renaissance is also adding to its yuan reserves with a new fund worth about 6 billion yuan, according to a person familiar with the plans who couldn’t be named because details of the fundraising aren’t yet public. Ion Pacific is raising 1 billion yuan for its debut fund in the Chinese currency, while GGV Capital is about to close fundraising for its first yuan-denominated fund.

“Some sectors don’t allow foreign investors, so for example, in the culture and media industry you need to apply for certain licenses like video licenses and you need to be a local investor,” said Helen Wong, a partner at Qiming Venture Partners.

“Now the IPO window is open for the local stock market, so that encourages a lot of companies to go for a local listing,” she added, in reference to the increase in IPO approvals by regulators in 2017 that is prompting more companies to start preparations to go public. Previously, a slow approval process and long line of companies waiting for clearance dissuaded many from those plans.

The shift would give an added boost to the Shenzhen and Shanghai bourses. China has had 322 new listings this year, raising a combined $22.9 billion, Thomson Reuters data showed. This already surpasses the 252 for all of 2016, even after the country’s securities regulator slowed the number of weekly IPO approvals in May.

It could also reduce the influence of the Nasdaq and New York stock exchanges, where many Chinese technology companies previously flocked when they went public.

“For the RMB side, you see more companies in restricted sectors like healthcare and media and certain parts of cleantech that needs government support to get started,” said Hans Tung, managing partner at GGV Capital. “You also see companies in the fintech space and a lot of them need a license to operate a business in the financial services industry, so they tend to want to list in China.”

As published in The New York Times.

China juices liquidity, and risk, at OTC exchange — Reuters

Reuters

China juices liquidity, and risk, at OTC exchange

SHANGHAI August 22 Thu Aug 21, 2014 5:10pm EDT

(Reuters) – Chinese brokerages will start making markets next week on China’s New Third Board, its leading over-the-counter (OTC) exchange but one long derided as a dead-end market populated by small little-known, opaquely managed firms.

The move has revitalized interest and trading volumes have exploded, but analysts warn of significant risk.

Most of the 66 Chinese brokerages so far approved to make markets – a business that requires deep cash reserves and sophisticated risk management skills – have little experience.

Market makers quote both a buy and sell price and guarantee share availability by holding shares themselves in inventory, which requires careful real-time management.

For brokerages it means extra profits, while China’s policymakers hope the liberalization will boost liquidity in an exchange that can provide capital for small innovative firms, needed for the next phase of economic expansion.

But, analysts fear that brokerages inexperience coupled with inadequate disclosure by listed companies could led to trouble for an exchange already saddled with image problems.

“Like all OTC markets – including… America’s Bulletin Board and Pink Sheets – China’s Third Board suffers from inherent fundamental flaws,” said Peter Fuhrman, chief executive at China First Capital.

“Liquidity and valuations are persistently low and disclosure is spotty. If it was designed to be a solution to the problem of erratic mainstream IPO policy and approvals on China’s main Shenzhen and Shanghai stock exchanges, the Third Board must be judged a major disappointment.”

Regardless of critics, trading volumes on the exchange soared almost 700 percent in May when Chinese media first reported the advent of market-makers, ChinaScope Financial data shows. Foreign investors are unable to trade on the exchange.

A Reuters analysis of daily data from the National Equities Exchange and Quotations (NEEQ), which runs the New Third Board, shows that August volumes are set to surpass May’s record. Transactions worth 1.16 billion yuan ($188.63 million), as of Aug. 19, were nearly double July’s total, while the volume of shares traded has more than tripled month-on-month.

SMALL CAP CELEBRATION

Smaller private companies in China are the country’s biggest aggregate employers and generators of GDP, but they have difficulty getting bank loans and even more difficulty getting regulatory approval to list on major markets or issue bonds.

However, while dozens of local governments have created OTC markets to help match companies with investors, the lack of market makers and lack of a clear upgrade path to major exchanges has caused most firms and investors to steer clear.

But that may be about to change.

“The expectation is that the Third Board can be an entree onto the growth enterprise board for select small companies,” said Brian Ingram, chief investment manager at Russell Ping An Investment Management.

“If the board does serve that purpose, it’s likely to see pretty rapid growth, and the catalyst for that growth is the fact that regulators are allowing brokerage houses to serve as market makers.”

Brokerages hope it will boost in profits, something they need badly having struggled since 2010 as investors steadily switched out of Chinese stocks, among the world’s worst performers, in favor of housing and high-yielding wealth management products.

SMALL-CAP FEEDING FRENZY

Chinese investors enthusiastically trade small, volatile tickers listed on Shenzhen’s ChiNext growth board, so some predict a revitalized OTC board will attract similar speculative interest, further supporting liquidity.

However, sustained interest from both investors and companies depends on whether regulators formally commit to allowing companies on the New Third Board upgrade to ChiNext.

“We’re now considering listing on the New Third Board, but we are waiting for policy confirmation that we can upgrade to ChiNext,” said Cui Lijun, deputy general manager at robotics firm LEN in Shenzhen.

Similar experiments have disappointed in the past, such as the hard-currency-denominated “B-share” board. Speculators bought B-shares hoping they would ultimately be upgraded to yuan-denominated A-shares, but in the end only a few companies were allowed to transfer, leaving the rest stranded.

CALLS FOR CAUTION

The chequered history of OTC markets in China and abroad, especially with regards to disclosure standards, also has many calling for caution.

In the late 2000s, small Chinese companies began listing on American OTC boards, and some managed to upgrade to major exchanges such as NASDAQ. But many were subsequently found to be riddled with accounting irregularities, causing a swathe of delistings.

Given this history, it is unclear whether regulators want to expand the aggregate OTC market or consolidate it.

Out of all of China’s 26 OTC markets, the New Third Board is the only one that companies from anywhere in China can list on, and it will now be the only one where making markets will be allowed.

Some analysts said that this means the government may be elevating the Third Board, so it can then kill off the rest.

But Zhang Yunfeng, the head of Shanghai’s rival OTC market, said in an interview published in China’s Securities Times on Wednesday that he doesn’t feel threatened.

“I’m not optimistic about the market making institution … if there’s not enough base liquidity, market making will have a hard time enabling market performance.”

www.reuters.com/article/2014/08/21/us-china-markets-otc-idUSKBN0GL26920140821

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China IPO, the media headline and reality could hardly be more worlds apart — Reuters

Reuters

Reuters headline

 

 

Spot the difference between the headline and the factual content of the article? One is designed to capture your attention, if not ruin your day. The other conveys less alarmist, less hyperventilated facts.

Something similar is at work in this article published by Reuters yesterday on China’s IPO market, the recent delays and the prospect for resumption later this year. Click here to read the Reuters article.

Reading just the headline, “China IPO promised land turns to desert as regulator review stokes confusion“, and you would likely conclude China’s IPO market had turned to a barren wasteland, where no Chinese company would anytime soon be able to tap the public markets for capital. One certainly would not expect, 24 hours earlier, another respected business publication, in this case the Wall Street Journal,  to publish an article that suggests the IPO process in China is about to boom.

Yet, that’s what happened. Same weekend. Same China. Wildly divergent realities.  Here’s the Journal article.

So, what’s going on here? Well, first off, the Wall Street Journal article is, both headline and body, a lot closer to the truth, at least as far as I’m able to judge. IPOs in China, after a two month hiatus, are about to start up again. The country’s securities regulator, the CSRC, is introducing a new market-based process of IPO approval. It’s a 180-degree change over the IPO system in China prevailing until the start of this year. Big change, and some big bumps along the road. But, overall, China is heading clearly in the direction where IPOs — which companies, when and at what listing price — will be decided by the market, by investor demand, not regulatory fiat.

The Reuters story, on the other hand, tries to mount a case that things have broken down rather seriously. The text of the article, to be fair, doesn’t entirely reflect the content of that headline. This sometimes happens, based on my experience back some twenty years ago working as a journalist. But, the gap here between headline and story, as well as between headline and fact, is larger than one might like to see.

My guess is the Reuters reporters started out with a plan to write about the breakdown in China’s IPO market, gathered up some quotes, as well as a bit of evidence, in the form of 24 companies (out of a total of over 700) dropping off the IPO waiting list. They called me ten days ago asking for a comment, probably knowing I don’t see things to be quite so dark and hopeless. That quote appears at the very bottom of the article. Here’s the full text of what I told them.

The Reuters article was written, edited and was waiting to be published when, perhaps inconveniently for Reuters,  the CSRC unexpectedly announced late Friday that 28 Chinese companies are well-along in their IPO plans and should close their fund-raising soon. That’s the story the Journal published.

Reuters went ahead and published its story. It didn’t bother to change that gloomy headline, and didn’t mention this news about a large batch of IPOs about to move forward. The “desert” Reuters describes apparently can sustain IPO life after all.

 

 

 

 

China’s New IPO Regime — manipulation or emancipation? — Reuters

Reuters

reuters

In English we use the phrase ” bee in one’s bonnet” to explain someone with an obsession for a particular point of view. In Chinese, a similar idiom is 挥之不去, meaning you can’t wipe out the stain.

Have a  look at this article today by Reuters, about the IPO process in China. To me, the reporters started off this story with a bee in their hats, that China’s domestic IPO industry remains a nest of corruption, manipulation and ominous doings by the regulator, the CSRC. They found someone to quote, and then asked me for my opinion. I shared it across several emails. As you’ll see, I end up being quoted in the article providing something of an antidote to all the negativity. I don’t think, to switch back to the Chinese,  I quite wiped away the stain.

Here’s the story that didn’t get reported. In the last five weeks, China’s domestic stock markets had 48 successful IPOs. That is exactly 48 more than China had in all of 2013, and ahead of the successful IPOs so far this year in Hong Kong and the US. In my view, China is on track, as I said in one of those emails to the Reuters reporter, “to shatter all worldwide records for number of IPOs in a year and money raised.”

That’s big news. Instead, the article focuses on a whole lot else that all boils down to dark mutterings, but not a lot of facts, suggesting that insider trading  is or may become rife; that there’s some form of “moral hazard” at work here. Hard to refute. Equally hard to confirm.

The one example cited, of the cancelled Jiangsu Aosaikang, is said by a source to be “most heavily intervened IPO in the history of China”. IPOs, for those keeping score, get pulled all the time, everywhere, most often because investors wouldn’t commit to buying all the shares on offer. What happened with the Jiangsu Aosaikang IPO no one can say for sure. But, the quote is just silly.

Until two months ago, all China IPOs involved a level of direct, disclosed, intensive intervention by the CSRC that covered not only the IPO offering price, but included too the CSRC making decisions on which Chinese companies should IPO, when, with what level of profits. This was intervention on a grand, intentional and absolutist scale.

We’re only in the second month of the new IPO regime in China. Things might degenerate. The CSRC and market participants like underwriters are still feeling their way forward. But, there’s ample room for optimism here: a highly-damaging IPO embargo is over, Rmb 30 billion  ($5 bn) has been raised, and there’s clearly investor appetite for more new issues.

Reuters