During preparations for the listing of Chinese company Travelsky Technology it emerged over the weekend that all new listings of Chinese companies, whether at home or abroad, will have to surrender 10% of the cash proceeds to the State social security fund.
The logic of this tax (what else is it?) is that most of the companies being listed are, like Travelsky Technology, state owned, and that if private investors take them over then they should pay towards the companies' social responsibilities. In the case of Travelsky, which provides IT solutions to airline companies, and is owned by a around 20 Chinese (state) airlines, it is these shareholders who will receive the proceeds of the mainland and Hong Kong listings, and will have to pay the money to the Chinese social security fund.
The new Ministry of Finance regulations come into effect at a time when China has a major programme on foot to sell down or dilute its stake in SOEs (State-Owned Enterprises) through stock market listings. Lee Zhang, executive director of Goldman Sachs (Asia), the company's listing sponsor, said that Travelsky Technology was one of the first companies to be affected by the new rule.
In a teleconference with analysts on Sunday to describe Travelsky's listing plans, Chairman Yang Jun, not looking totally happy about it, confirmed the new regulation: "Based on a new Ministry of Finance regulation, every SOE that will be listed either domestically or internationally, will have to contribute 10 per cent of its listing proceeds toward a social security fund managed by the central Government," he said.
According to Travelsky's listing prospectus, it will make the payment in the form of a special dividend to its existing shareholders - the airlines plus CACIC, the Civil Aviation Computer Information Centre - after the IPO has been completed.
The new regulation applies only to initial listings, not to funds raised through secondary financing activities. With the Chinese government in control of the listing proess, the obvious market response (to raise the minimum from a first listing, and go back to the market soon afterwards) will only be available to companies already in private ownership, although the interests of the executive management in companies to be listed (and their shareholders, who are also listing candidates in many cases) will diverge from the interests of the Chinese Government.
All Governments tax individuals and companies to provide for social security needs, but it takes a particularly bone-headed Ministry of Finance to suppose that punishing investors for their interest in privatised companies will do anything other than dent investor interest and reduce prices, perhaps thereby losing more than is gained via the tax.
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