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Nasdaq cracks down on shady Chinese IPOs

Nasdaq's Office Building

When Currencies are Held Hostage.

China’s economy on account of being heavily influenced by communism, is heavily state regulated. In an effort to maintain CNY (Chinese Yuan) versus US Dollar exchange rate pegs, China revised a series of economic plans in 2015. One of those steps was to introduce a series of capital and exchange controls.

Tighter cross border monetary transfer policies have effectively served their primary function, to reduce capital outflow. However, south china morning post reported a 64% fall in overseas acquisitions by Chinese companies by the Q1 of 2017.  This does not sit well, doubly so in the middle of ongoing US-China trade wars.

Exploiting Loopholes.

To get around that problem, Chinese investors and entrepreneurs would seek US based IPOs until recently as Nasdaq passed heightened restrictions aimed at cracking down on shady Chinese IPOs.

One critical quality of our capital markets is that we provide non-discriminatory and fair access to all eligible companies. The statutory obligation of all U.S. equity exchanges to do so creates a vibrant market that provides diverse investment opportunities for U.S. investors – Nasdaq Spokeswoman

At the core of this ban were the unfair practices Chinese companies would engage in. The shares would be traded on thin margins because most of these shares stay within the board and are means of nothing more than means for said executives to cash out on US Dollars which is a lucrative proposition, given China’s capital restriction policies. Apart from this, these low liquidity listings use their Nasdaq-listed portfolio to raise capitals globally.

Go High Liquidity, or Go Home.

According to data made available by Refintiv, Out of 155 companies listed on Nasdaq since each 2000’s, grossly 40 IPOs had liquidity as low as $ 25 Million. Reuters reported companies like 111 Inc, a Chinese online pharmacy network netted $ 100 Million through mostly inside sales of stocks. Similarly, digital influencer incubator Ruhnn Holding Ltd, post-school education provider Puxin Ltd, and pet product manufacturer Dogness International Corp. are all examples of Chinese companies which listed on Nasdaq in the last two years to carve out their shares.

Notably, these companies have a notoriously low market liquidity which brings them on the crossroads with Nasdaq’s institutional investors, and the changes made.

Nasdaq’s concern about low liquidity and high volatility in the marketplace brought about by such Chinese IPOs has become very obvious since mid-2018 – Ralph De Martino

The Road Ahead

To match the global standards, Nasdaq’s new rules have higher average trading volume mandates along with a minimum investment of $2,500 by no less than 50% of the company’s shareholders.

With these stringent rules, Nasdaq aims to be on an equal footing with Chinese and Hong Kong exchanges which have similar if not tougher barriers of entry. In this time of crippling crisis, trade cooperation is but necessary. At the same time, a country’s interest towards it’s own people triumphs allowing exploitative practices. As the decision’s impact on the market starts to take shape, we will know if Nasdaq’s policies prevail or sink the economy further.

About the author

Sayon Bhattacharya

A student, Quant Dev, Finance & Capital Market Enthusiast, and now a blogger on The Indian Wire living in the Financial Capital of India, Mumbai. Sayon is a multi faceted individual with limitless enthusiasm to enlighten the uninitiated in the realm of Finance and Business. He enjoys sharing his knowledge and understanding of current and core happenings in these domains with startling simplicity and ease of understanding. Stay tuned to know more about the latest happenings and be up to date with the market.

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