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Chinese companies retreat from U.S. listings as scrutiny mounts

A sign for the Securities and Exchange Commission (SEC) is pictured in the foyer of the Fort Worth Regional Office in Fort Worth, Texas June
A sign for the Securities and Exchange Commission (SEC) is pictured in the foyer of the Fort Worth Regional Office in Fort Worth, Texas June

By Dena Aubin and Olivia Oran

NEW YORK (Reuters) - Chinese companies are deserting U.S. stock markets in record numbers as regulatory scrutiny mounts and the advantages of a U.S. listing slip away.

U.S. government investigations of suspect financial reports and battered share prices have for many Chinese companies wrecked the chances of raising new money in the United States and given them little reason so stay, China experts said.

"There's very little in way of new capital flows to those companies, their valuations are low and they're encountering significant headwinds in terms of regulatory oversight," said James Feltman, a senior managing director at Mesirow Financial Consulting.

Twenty-seven China-based companies with U.S. listings announced plans to go private through buy-outs in 2012, up from 16 in 2011 and just six in 2010, according to investment bank Roth Capital Partners. Before 2010, only one to two privatizations a year were typically done by China-based companies, Roth said.

In addition, about 50 mostly small Chinese companies "went dark," or deregistered with the U.S. Securities and Exchange Commission, ending their requirements for public disclosures. That was up from about 40 in 2011 and the most since at least 1994, when the SEC's records start.

Companies with a limited number of shareholders can voluntarily go dark and rid themselves of the cost of public filings without buying out investors, but those investors often suffer as the value of their shares falls.

SHARES TAKE DOUBLE-DIGIT DIVE

"It's just another black eye for U.S.-listed companies," said James O'Neill, managing director of Jin Niu Investment Management Co, a Beijing-based firm.

Meanwhile, just three Chinese companies successfully went public on U.S. exchanges in 2012, down from 12 in 2011 and 41 in 2010.

About 300 China-based companies still have shares trading in the United States on exchanges or "over-the-counter" between individual dealers.

Bankers are aggressively pitching the idea of companies pulling out of the United States and relisting elsewhere, saying they can get a better share price in Hong Kong or mainland China, according to lawyers who work on going-private deals.

"The idea is that the markets here understand the China story better and will therefore hopefully assign a higher valuation to the stocks," said Mark Lehmkuhler, a partner at Davis Polk in Hong Kong.

U.S.-listed Chinese companies in the consumer staples sector, for example, were trading recently at a 67 percent discount to comparable Chinese companies on the Hong Kong Exchange, according to investment bank Morgan Joseph.

REGULATORS IN HIGH-STAKES STANDOFF

A failure by U.S. regulators to reach an agreement soon with China on accounting oversight may push more Chinese companies to abandon their U.S. listings, bankers and lawyers said.

The United States has been trying to get access to audit records and permission to inspect Chinese audit firms to combat a rash of accounting scandals. China has balked, leaving the future of U.S. listings for Chinese companies in doubt.

"I expect everyone is making alternative arrangements" in case U.S. and Chinese regulators do not reach a deal, said Paul Gillis, an accounting professor at Peking University in Beijing.

Stepping up pressure, the SEC has deregistered about 50 China-based companies over the past two years. Last month, it charged the Chinese arms of five top accounting firms with securities violations for failing to turn over documents, raising tensions in its standoff with China.

While most of the recent going-private transactions have been management-led buy-outs, cheap share prices have also led to several deals from large private equity firms.

A Carlyle Group LP-led consortium last month agreed to buy display advertising company Focus Media Holding Ltd for about $3.7 billion in the largest-ever private equity deal in China. The success of that deal may prompt others, lawyers said.

"As long as you've got financing available, you're likely to continue to see new deals being announced," said Jesse Sheley, a partner at Kirkland & Ellis who worked on the Focus Media deal.

Despite the billions being poured into the private markets, it may take longer for U.S. stock investors to feel comfortable investing in Chinese public companies again.

Investors are saying, "'What can I trust about these companies at all?'" said O'Neill at Jin Niu. "It's not a matter of good company versus bad company. The market has just turned against you."

(Reporting By Dena Aubin; Additional reporting by Rachel Armstrong in Singapore and Stephen Aldred in Hong Kong; Editing by Kim Dixon and Dan Grebler)

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