By John Plender
What is happening to investors’ risk appetite? The continuing downward pressure on US Treasury bond yields indicates a degree of caution in the air. For their part equity investors have been retreating into size and quality. There has also been a global sell-off in technology stocks after a period in which demand in the IPO market for shares in companies that made no money knew no bounds.
Yet there are pockets of gung-ho risk-taking in global markets where caution is being thrown to the wind. Untried instruments such as contingent convertibles in banking, for example, are finding enthusiastic buyers, reflecting the manic search for yield. Still more intriguing is the renewed American interest in Chinese company IPOs, despite the raft of accounting frauds that emerged from the now notorious Chinese reverse mergers on the Nasdaq exchange in recent years.
Last week JD.com, the Chinese online direct sales company, was successfully floated on Nasdaq at a valuation of more than $25bn despite never having made a profit since inception. This followed the earlier successful IPO of Sina Weibo, China’s answer to Twitter, which was also lossmaking. Yet corporate governance at JD.com compares unfavourably with US tech companies. Given the dual voting share structures and crony boards that exist at the likes of Google and Facebook, that is a serious stricture.
At JD.com Richard Liu, the founder, combines the role of chairman and chief executive while retaining 83.7 per cent of the voting power despite owning only 18 per cent of the total equity.
Nasdaq still, despite the record with Chinese companies, allows foreign issuers to apply lower corporate governance standards of the home country, which in this case is the Cayman Islands, not China. The Cayman jurisdiction is flabby on independent representation in the board room, so outside shareholders lack an important protection they badly need in the light of other governance shortfalls.
The directors and executives, along with their assets, are in China, which means any infringement of outside shareholders’ rights cannot be addressed effectively through the US courts.
American investors’ ownership rights are also weak because property rights in China are notoriously vague and changeable at official whim. Nor are they likely to see any hard cash from the company since it does not propose to pay out dividends.
Quality of information (or lack of it) is likewise an issue. No formal assessment of internal control was conducted before JD.com’s flotation. What the directors do know is that there is a material weakness in control because not enough people in the company have adequate knowledge of US accounting principles.
Why, then, are investors prepared to plunge in where governance angels fear to tread? The answer is that JD.com is already the largest online direct sales company in China by transaction volume. You do not have to believe it will achieve its stated goal of becoming the largest ecommerce company in the world to see the case for a directional bet to acquire exposure to a high growth economy that is preparing to rebalance from investment and exports to consumption-led growth.
Lack of profit simply reflects heavy investment in growth. As with tech stocks in the US there is also a temptation to regard such investments as a lottery ticket on the company dominating a large new growth market or disrupting a large existing market by initiating a process of creative destruction.
The same arguments will no doubt be applied to Alibaba, the much larger Chinese ecommerce company that is expected to float in the US later this year.
Yet buyers should beware because China is no exception from the norm in IPO markets whereby big gains can be made on day one, yet longer-term returns disappoint. Between 1993 and 2013 168 companies from Hong Kong and China went public on organised stock exchanges in the US, not including those notorious reverse mergers.
Jay Ritter, a professor of finance at the University of Florida, calculates that in the three years from flotation the average return on these 168 IPOs was minus 3.6 per cent, or an average of minus 1 per cent a year. Investors who bought the S&P 500 would have earned an average 23 per cent or about 8 per cent a year. In fact, Chinese stocks have performed dismally over the period regardless of where they were traded.
China thus performs a function in global markets that Latin America performed in earlier centuries. It is a place of boundless promise with an endless capacity to part investors from their money. The novel feature is that China has performed this trick while delivering astonishingly high economic growth.
The writer is an FT columnist
但在全球市场中同样存在不少热情高涨的冒险行为，谨慎被扔进了风里。例如，银行的或有可转换债券(contingent convertible bond)等未经市场检验的投资工具受到了买家的热烈追捧，这反映出了市场对收益率的狂热追求。更加引人注意的是，美国投资者对中国企业的IPO交易重新产生了兴趣，虽然近年来中国企业在纳斯达克(Nasdaq)交易所的反向收购交易中爆出了大量会计欺诈丑闻，而反向收购模式现已声名狼藉。
据佛罗里达大学(University of Florida)的金融学教授杰伊?里特(Jay Ritter)测算，上述168支股票在上市后的三年当中，平均累计收益率为-3.6%，或者每年的平均收益率为-1%。如果投资者同期购买了标普500(S&P 500)指数产品，则将实现23%的平均累计收益率或者每年8%的收益率。事实上，在这一时期里，中国上市公司股票的走势都很惨淡，不论它们的上市地点是在哪里。