Listing rules and ownership structures set to change amid increasing turbulence

The creation of a strategic emerging industries board on the Shanghai Stock Exchange, which is intended to bring back overseas-listed Chinese high-growth and innovative companies, will have to wait for the revision of the Securities Law, said an expert on stock financing.

After the revision, which is expected to be finished in November, the requirement that companies wanting to list must have a three-year record of profits will be dropped, said Liu Jipeng, a member of the Securities Law revision working group and director of the Capital Research Center at the China University of Political Science and Law.

Administrative approval for new offerings under the country's top securities regulator will also be changed into a registration system, and that will "fundamentally" eliminate barriers for high-growth and innovative companies wanting to list on the domestic stock exchanges, he said.

Strict listing requirements and red tape drove many Chinese high-tech companies, especially the Internet companies, to list on overseas capital markets.

As Chinese Internet startups often have difficulty meeting profitability requirements to list onshore, the Nasdaq in the United States has been a major forum for such companies to list.

Companies such as Alibaba Group Holding Ltd, Baidu Inc and Tencent Holdings Ltd used a so-called variable interest entity structure to raise funds in overseas capital markets while retaining absolute equity control of the company.

The VIE structure was developed to satisfy the ownership requirements of overseas security regulators without technically breaking Chinese law, because foreign ownership in China's Internet sector is restricted. But many overseas investors distrust such entities.

"The current situation is, most of the overseas-listed Chinese companies can hardly raise funds in a sluggish market. Instead, they are attracted by the domestic capital market," said Liu.

"More than 90 percent of the overseas-listed companies hope to return. They are only waiting for changes in listing policies. It also takes time to 'break' the VIE framework and change ownership structures."

On June 16, the State Council, issued a statement of support for the creation of a strategic emerging industries board on the Shanghai Stock Exchange.

To go from 2,200 points to more than 5,000 points, the benchmark Shanghai Composite Index needed only half a year, starting in October. A surge like that is a rare event in world capital market history.