NYSE/NASDAQ: NO OFFICES, BUT STILL OPEN FOR BUSINESS

UNCLAS SECTION 01 OF 04 SHANGHAI 000070

SIPDIS

SENSITIVE
SIPDIS

STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN
FRANCISCO FRB FOR CURRAN/GLICK/LUNG; NEW YORK FRB FOR
CLARK/CRYSTAL/MOSELEY
STATE PASS CFTC FOR OIA/GORLICK
CEA FOR BLOCK
USDOC FOR ITA DAS LEVINE AND OCEA/MCQUEEN
TREASURY FOR OASIA - DOHNER/CUSHMAN
TREASURY FOR IMFP - SOBEL/MOGHTADER
NSC FOR KURT TONG

E.O. 12958: N/A
TAGS: EFIN EINV ECON PREL CH
SUBJECT: NYSE/NASDAQ: NO OFFICES, BUT STILL OPEN FOR BUSINESS

REF: A. SHANGHAI 45


B. 06 SHANGHAI 6347

C. SHANGHAI 25

This cable is Sensitive But Unclassified. For official use
only, not for dissemination outside USG channels.


1. (SBU) Summary: Seeing China as the next great frontier for
emerging markets, the New York Stock Exchange (NYSE) and NASDAQ
have been engaging in a "Great Game" to persuade Chinese
companies to list on their respective exchanges. Chinese
entrepreneurs view being listed on U.S. markets as the sign of
having "made it," and Chinese company initial public offerings
(IPOs) were some of the biggest stories last year on the U.S.
market. However, the China Securities Regulatory Commission
(CSRC) has not yet allowed NASDAQ and NYSE to open
representative offices as promised in December 2006, making it
difficult for the exchanges to attract Chinese businesses.
Despite these problems, NASDAQ and NYSE officials expected to
see more Chinese companies listing on their exchanges in 2007.
End summary.


2. (SBU) China's economic growth and opening process has led to
the creation of flourishing private companies and privatization
of many state owned enterprises. NASDAQ Senior Managing
Director/Head of Asia Pacific James Ogilvy-Stuart and Asia
Pacific NYSE Group Executive Director Michael Yang, in separate
meetings with Econoff on January 19 and January 23, said Chinese
companies viewed listing on U.S. stock exchanges as a sign of
having "made it" and there was considerable "face" gained.
Chinese company owners liked the prestige of having passed the
stringent listing-requirements posed by U.S. regulators and
exchanges. Some companies sought listing despite not actually
needing access to additional capital (Ref A).


3. (SBU) Both exchanges were actively competing with one another
to find companies that were able to list. In one case last
year, NASDAQ wooed a Chinese solar energy company, Canadian
Solar, Inc., away from NYSE less than a month before its planned
listing date. While the majority of companies that have listed
on the two exchanges have been unsolicited "walk-ins," both
exchanges have started a process of actively pursuing companies.
In addition to competing with each other for companies that
want to list outside of China, the exchanges have also competed
with other countries' exchanges, notably those in Hong Kong,
London, and Singapore.

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Waiting on the Regs: NYSE/NASDAQ Offices Not Yet Open
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4. (SBU) NASDAQ and NYSE have not been allowed to open official
offices in China, a major obstacle to doing business in China.
With no official presence in China, Mainland companies have
found it almost impossible to locate NYSE and NASDAQ's
representatives. While both exchanges had representatives in
China, their business cards listed Hong Kong or New York offices
and they relied on word of mouth to spread their contact
information. (Note: In the lead-up to Secretary Paulson's
September visit to Hangzhou, Congenoffs also struggled to locate
the NYSE/NASDAQ country representatives. We finally located
them through a contact at the Shanghai Stock Exchange. End
note.)


5. (SBU) In a January 25 meeting held in Beijing as part of the
U.S.-China Financial Services Working Group, Treasury Department
Deputy Assistant Secretary Mark Sobel asked China Securities
Regulatory Commission (CSRC) International Director Zhang Weiguo
about the status of China's Strategic Economic Dialogue
commitment to allow NASDAQ and NYSE to open representative
offices. Zhang responded that the CSRC had not yet completed
the drafting of regulations required to allow international
securities exchanges to open offices. He expected this process
would be done by the end of March, though he was not certain

SHANGHAI 00000070 002 OF 004


that this timing would also include the mandatory "public
consultation" time on such regulations. Zhang said that if the
consultation process was not "smooth" then there would be
delays. Sobel informed Zhang of continued high-level U.S.
interest in this issue. He noted that reforming China's
financial service sector was of great importance to the U.S. and
critical to China's continued economic growth. Zhang
acknowledged the importance of allowing NASDAQ and NYSE to open
their offices, noting that "the political decision has been
made, but we are still working on the process." (Note: Econoff
attended the FSWG meetings in Beijing, January 25-26. End note.)


6. (SBU) Both NASDAQ's Ogilvy-Stuart and NYSE's Yang expressed
their gratitude for Secretary Paulson and Ambassador Randt's
efforts on their behalf to secure permission from the Chinese
government to open offices. The dinner that Secretary Paulson
hosted in Hangzhou (Ref B) created a great deal of "buzz" in
China's entrepreneurial circles according to Yang. He had been
approached by lots of businessmen and government officials who
wanted to know what had been discussed in this "private" meeting
and how they might secure invitations to a future meeting. Both
wxchanges were ready to submit applications as soon as the CSRC
informed them of the requirements. Continued efforts by the USG
to work on their behalf, with the CSRC, were greatly appreciated.

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Why List in the U.S.?
--------------


7. (SBU) Yang and Ogilvy-Stuart, separately, outlined the main
reasons that Chinese chief executive officers give them for
listing on the U.S. exchanges:

- The U.S. continued to be the largest source of available
liquidity and companies were able to get a higher valuation than
they would have received in Hong Kong, Singapore, or even
London. In general, high technology and energy companies
received a higher P/E ratio from U.S. investors. Rightly or
wrongly, said Ogilvy-Stuart, U.S. investors had a great deal of
confidence in "anything China," and therefore they might not
scrutinize Chinese stocks in the same way that they would
U.S.-based stocks.

- Yang told Econoff that historically Chinese people, for
"cultural reasons that are deeply rooted in their minds" have
seen the U.S. as having the best and strongest economy. For
Chinese entrepreneurs, listing in the U.S. is "their final
target, their final dream and like winning the Oscar."
Ogilvy-Stuart said that with all of the competition in China,
being listed in the U.S. provided the Chinese company with the
cachet of being a leading company in China. Even the companies
that do not need the capital, still wanted to list. Yang quoted
Suntech's Shi Zhengrong as saying, "The best company needs to be
listed on the best exchange." Listing in the U.S. therefore was
an "honor" and something that "face-conscious" Chinese
businessmen wanted.

- Listing on an overseas exchange, particularly the U.S.
improved their company's visibility overseas. Mindray's
chairman told Yang that 50 percent of his business originated
from overseas. Being listed on the NYSE gave his non-domestic
prospective-customers greater confidence in his company and led
to increased sales. Companies liked the international
recognition they could get from being listed.

- More and more Chinese companies were seeking merger and
acquisition (M&A) opportunities in global business
consolidation. Using stock rather than buying companies with
cash had been seen as a viable opportunity for listed companies.
Yang said that Suntech bought one of Japan's premier solar
power companies by using a combination of stock and cash -- in
what he believed was the first time a Japanese company was
purchased using something other than cash alone.

SHANGHAI 00000070 003 OF 004



- China's internal cities found it difficult to attract and
retain quality people. A company that was listed on NYSE/NASDAQ
was in a better position to provide assurances to prospective
employees that that their opportunity costs of taking a job in
the interior was worth the risk. Yang said that this had been
especially true for recruiting returning Chinese students from
the United States. A U.S. listing made these companies "much
more attractive" and demonstrated that despite being located in
an economically depressed area, the company itself was more
stable and had better prospects.

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After Clearing China's Barriers, None to Entering U.S.
-------------- --------------


8. (SBU) Ogilvy-Stuart said that in the past, Chinese companies
usually took six to eight months to complete the Chinese
paperwork necessary to allow them to list. Once this was
completed and they had met USG standards for listing, there had
been no particular USG regulatory hurdles for Chinese companies.
Both Yang and Ogilvy-Stuart noted that Sarbanes-Oxley had
increasingly been seen as not a problem or insurmountable
hurdle.


9. (SBU) According to Yang, however, new Chinese regulations
governing M&As, the Interim Provisions for Foreign Investors to
Merge Onshore Enterprises, meant that any Chinese company
seeking to list overseas via a special purpose vehicle (SPV) and
therefore transfer company assets overseas must be approved by
six government agencies. These were the Ministry of Commerce,
State Assets Supervision and Administration Commission, State
Taxation Bureau, State Administration of Industry and Commerce,
State Administration of Foreign Exchange and have final China
Securities Regulatory Commission approval. Since September 8,
when these regulations came into affect, Yang knew of no Chinese
company that had successfully obtained this approval. In fact,
he knew of no company that had successfully gotten approval from
even a single agency, although he was aware that "many companies
have tried." As Yang put it, the end result was that Chinese
companies had been unable to reorganize, unable to get the
injection of capital that they needed to grow, and this was
hurting the Chinese. While not every company needed to go
through the SPV process to list overseas, Yang said that this
had been the method-of-choice for most companies listing in the
United State.

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NASDAQ in China
--------------


10. (SBU) Ogilvy-Stuart told Econoff, on January 19, 2007, that
there were 34 Chinese companies listed on NASDAQ. These
companies represented a broad range of industries from
advertising and hotels to high-tech internet companies and
medical equipment manufacturers. In 2006, six Chinese companies
had their initial public offering (IPO) on NASDAQ. Two of the
ten top performing IPOs in 2006 were Chinese companies --
e-Future Information Technology Group (EFUT) closed the year up
531 percent from its October 2006 listing and Home Inn (HMIN)
ended 2006 up 139 percent from its October 2006 listing. He
said that China was a key strategic region for NASDAQ and
expected that 2007 would see more Chinese companies list on
NASDAQ than in 2006.

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NYSE in China
--------------


11. (SBU) Yang told Econoff on January 23 that there were 22
Chinese companies listed on NYSE. The first of these was
Brilliance Automotive Company in 1993. In 2006 - there were
three 3 IPOs (New Oriental, Mindray, Trina) and one company

SHANGHAI 00000070 004 OF 004


transferred from the London Stock Exchange's AIM board to NYSE
(American Oriental Biotech). Yang expected that there would be
about eight IPOs in 2007. Yang said that prior to 2005 most
small/medium-sized (SME) private companies did not consider
listing on NYSE which had mainly attracted large state-owned
enterprises. However, the very successful listing of
privately-held Suntech in 2005, was a turning point and many
SMEs had considered listing on the NYSE.

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SHANGHAI'S EXCHANGE, NYSE/NASDAQ: NOT IN COMPETITION
-------------- --------------


12. (SBU) While NYSE and NASDAQ competed with one another and
other international exchanges for companies, both noted that
they viewed their own exchanges as fundamentally complementary
of mainland China's two exchanges - the Shanghai and Shenzhen
Stock Exchanges. Shanghai Stock Exchange (SSE) Deputy Director
Chao Kejian, in a December 8, 2006 meeting with Congenoffs
shared the same view. The SSE did not view NYSE and NASDAQ as
competitors. Rather the U.S. exchanges allowed companies that
might not be able to list in China due to Chinese regulatory and
profitability requirements access to much-needed capital. He
noted that he had even advised some companies, such as
information technology companies, to pursue listing in the U.S.
since they would have better valuations there than they could
achieve in China. He hoped that these companies would
eventually return to be listed on the SSE, but in the near- to
mid-term, listing overseas was in their best interests. While
NYSE and NASDAQ were not viewed as competition, Chao noted that
the Hong Kong Stock Exchange was. (Note: See Ref C for more
information on the SSE and its relationships with NASDAQ and
NYSE.)


13. (U) DAS Sobel cleared on paragraph 5 of this report.
JARRETT