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Seller Beware: Thinking Twice About Overseas Listings

Two of China's most prestigious newspapers, Southern Weekend and Business Watch, discuss China Life's New York Stock Exchange listing and the subsequent disclosure debacle.

Southern Weekend: Is ignorance an excuse?

There were two disputed decisions during the reorganization and overseas listing of China Life. One was the method of dealing with the predecessor's losses from interest rate adjustments, which amounted to some 176.4 billion yuan (US$21.3 billion). They were finally assigned to a foundation set up jointly by the Ministry of Finance and the China Life Group. The other was the company's listing in the United States. Some executives opposed the NYSE listing, saying that supervision there is far stricter than in Hong Kong or on the domestic stock exchange.

The US securities regulations, promulgated in 1934, are geared heavily toward protecting medium-size and small investors. US law permits the filing of class actions when groups claim similar damages from the same entity.

The class action lawsuit will be heard by a jury composed of common people, who tend to sympathize with medium-size and small investors. The absence of related fees greatly encourages accusers and lawyers. In addition, any investor might be eligible to obtain compensation if he or she doesn't give up rights.

Professor Larry Lang of the Chinese University of Hong Kong says that China Life's underwriters were also responsible in this case, because they pushed the listing forward too quickly and made serious mistakes during the initial public offering (IPO).

"These international underwriters are not familiar with Chinese businesses," said one New York lawyer. He attributed the disclosure failure to this lack of experience.

The main underwriters were Citigroup, Deutsche Bank, Credit Suisse First Boston and China International Capital Corporation.

China Life lacked familiarity with the applicable laws as well.

This lack of experience was embodied in two mistakes made concerning the company's listing on the Hong Kong market. On December 17, 2003, the day before its IPO on the Hong Kong Stock Exchange, the number of scrip shares for small investors published in the South China Morning Post and Hong Kong Economic Times was incorrect. The Hong Kong securities regulator reportedly considered delaying the IPO for fear that share transactions might be influenced.

On April 7, China Life released the National Audit Office's notice of penalty against the company's predecessor. The English version was published in the English-language South China Morning Post, but the Chinese version appeared in the Hong Kong Economic Times the next day. All listed companies on the HK Stock Exchange are required to publish both Chinese and English announcements at the same time. China Life claims that it did not know about this regulation until it received complaints.

Business Watch: No escaping family ties

It was the predecessor, China Life Group, that was punished by China's Audit Office for irregularities, China Life is trying to claim. It says that there is no connection between the two companies.

Let's take a look at these SOEs whose subordinate companies split from the parent for listing. How can these companies maintain their existence once their good assets are split off? The method of splitting off China Life was said to be innovative. Sinopec, CNOOC, China Mobile and China Unicom are still big shareholders in their listed subsidiaries. However, China Life Insurance Company Limited and China Life Group are two equal corporations.

But no matter how they were restructured, their bad assets from before 1999 are still around. These assets add to the financial burden of the predecessor, most of which survive on the earnings from their listed subsidiaries.

China Oilfield Service Limited, the predecessor of CNOOC, trades its shares in Hong Kong. It is believed that this trial listing can improve the competitive ability and transparency of the listed parent.

However, listing of the predecessor is not a popular way to solve the problem. The affiliations in capital and business usually cause investors to lose confidence.

(China.org.cn, translated by Tang Fuchun April 21, 2004)

China Life Not Liable for Predecessor's Breach
SOE Overseas Listing Unlikely to Be Halted by US Security Probe
China Life Takes Step in Overseas Listing
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