NYSE-NASDAQ: REP OFFICES PENDING, PROBLEMS LOOMING

UNCLAS SECTION 01 OF 02 SHANGHAI 000512

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/ALTBACH/READE
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN
FRANCISCO FRB FOR CURRAN; NEW YORK FRB FOR CLARK/CRYSTAL/MOSELEY
CEA FOR BLOCK
USDOC FOR ITA/MAC DAS KASOFF, MELCHER AND MCQUEEN
TREASURY FOR OASIA - DOHNER/BAKER/CUSHMAN/MOGHTADER/SOBEL
TREASURY FOR WRIGHT AND AMB HOLMER
NSC FOR WILDER AND TONG

E.O. 12958: N/A
TAGS: EFIN EINV ECON CH
SUBJECT: NYSE-NASDAQ: REP OFFICES PENDING, PROBLEMS LOOMING

REF: A. Shanghai 250

B. SHANGHAI 337

(U) This cable is sensitive but unclassified and for official
use only. Not for distribution outside of USG channels or via
the internet. Contains Business Sensitive information.


1. (SBU) Summary: According to NASDAQ and NYSE representatives,
it was unlikely that their applications to open representative
offices would be approved soon. Although the applications were
submitted at the beginning of July, CSRC contacts told NASDAQ
and NYSE that approval was several months away. Representatives
were increasingly concerned about Chinese regulations that
limited the ability of Chinese companies to form special purpose
vehicles (SPVs). No new SPV application has been approved since
September 2006. By 2008, there will be few Chinese companies
left that are eligible to list overseas.

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NYSE/NASDAQ Rep Offices Still Months Away
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2. (SBU) NASDAQ Vice Chairman Mike Oxley and NASDAQ Head of Asia
Pacific Eric Landheer told Econoff, on August 7, that the China
Securities Regulatory Commission (CSRC) was reviewing their
application for a representative office. Landheer said that
NASDAQ had submitted its paperwork as soon as the CSRC had
allowed them to at the beginning of July (Ref A). The CSRC was
"studying the application" and had asked for additional
documentation for consideration, such as an "office manual."
Landheer understood from the CSRC that it would be two-three
months before their application was approved.


3. (SBU) On August 13, New York Stock Exchange (NYSE) executive
Director for Asia Pacific Yeeli Zheng told Econoff that the CSRC
was also still considering their application for a
representative office. Her contacts at the CSRC told her that
there did not appear to be any problem with the application, but
that it would take "several months to give it the green light."
Zheng understood that the application was "going through
technical procedures before it could be sent to the State
Council for approval." Zheng said that the CSRC had refused to
accept NYSE's application for an office that would represent all
of the stock exchanges under the NYSE Euronext umbrella. The
NYSE re-submitted its application to open a representative
office just for NYSE LLC.

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Chinese Overseas IPOs Are Drying Up
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4. (SBU) NYSE's Zheng noted the successful listings of two
Shanghai-based companies (E-House and WuXi PharmaTech) on the
NYSE in early August. The current implementation of China's
"Policy Number 10" or "September 8 Policy" from September 2006
(Ref B) meant that there would be fewer and fewer companies able
to list in the United States. (Note: Zheng referred to the
"Provisions for Foreign Investors to Merge with Domestic
Enterprises." Since this was implemented in September 2006, no
Chinese company has been approved to form a special purpose
vehicle (SPV) outside of China. Forming an SPV in a
tax-friendly country such as British Virgin Islands or the
Caymans has been the method of choice for most Chinese companies
to list on stock exchanges outside of China. End note.)


5. (SBU) Zheng said there were "two groups fighting in the
government" with different visions for developing China's
capital markets. One group supported Chinese companies pursuing
capital overseas. However, the group that was currently in
political ascendance wanted to "keep the good companies at
home." NYSE continued to pursue companies that had received
approval to form an SPV prior to September 2006. There were

SHANGHAI 00000512 002 OF 002


enough such companies to keep NYSE busy with initial public
offerings (IPOs) through the end of 2008. After that, "IPOs
will be hard," she said.


6. (SBU) Zheng did note that forming an SPV was not the only way
that Chinese companies could list on an overseas exchange. It
was, however, the preferred route for small- and medium-sized
companies. The tax benefits of forming an SPV greatly
outweighed those of listing overseas as a Chinese registered
company.


7. (SBU) NYSE has also started pursuing companies listed on
Chinese markets (A-Share companies) to list on the New York
exchange. According to Zheng, these secondary listings, while
not as profitable or visible as IPOs were the wave of the
future.


8. (SBU) NASDAQ's Landheer was also concerned about NASDAQ's
long-term future in China if companies were unable to list
overseas. He noted the irony of being able to open an office,
but having no business.
JARRETT