NASDAQ MIGHT HAVE LOOPHOLE TO RESTRICTIONS ON OVERSEAS

C O N F I D E N T I A L SECTION 01 OF 02 SHANGHAI 000787

SIPDIS

SIPDIS

STATE PASS FEDERAL RESERVE BOARD FOR AHMED/JOHNSON/SCHINDLER; SAN
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRB FOR DAGES/CLARK
STATE PASS CEA FOR BLOCK
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/READE
USDOC FOR 4420
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TREASURY FOR EXEC - TSMITH, OASIA/ISA -DOHNER/BAKER/CUSHMAN
TREASURY FOR AMB HOLMER/MEDEIROS/WRIGHT
TREASURY FOR SOBEL AND MOGHTADER
NSC FOR MCCORMICK AND TONG

E.O. 12958: DECL: 12/12/2032
TAGS: EFIN EINV PGOV CH
SUBJECT: NASDAQ MIGHT HAVE LOOPHOLE TO RESTRICTIONS ON OVERSEAS
LISTINGS

REF: A. SHANGHAI 769


B. SHANGHAI 337

C. SHANGHAI 70

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CLASSIFIED BY: Christopher Beede, Political/Economic Chief, U.S.
Consulate General Shanghai, Department of State.
REASON: 1.4 (b),(d)




1. (C) Summary: NASDAQ China's Chief Representative believes
that there might be a legal loophole to the restrictions on
Chinese companies listing overseas that have been in place since
September 2006. The first test of this "back door" will be in
March 2008. The Ministry of Commerce is very opposed to Chinese
companies listing overseas. Chinese securities brokers are also
opposed and have accused the NASDAQ rep of being an
imperialist-capitalist running dog. NASDAQ is working with the
China Securities Regulatory Commission to help start a third
stock exchange oriented towards small- and medium-sized
companies. Officials at the People's Bank of China have
expressed concern that they have no idea how much money is
leaving China via unofficial channels and fear that this might
lead to their loss of control over China's money supply. Once
this money is outside of China, it is used to fund overseas
investments, education, retail purchases, and savings. NASDAQ
declined the USG invitation to participate in a joint
representative offices opening ceremony with the NYSE, hosted by
Secretary Paulson, in order to be the first overseas stock

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market to open a representative office in China. NASDAQ opened
its representative office in Beijing on December 3. End summary.

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NASDAQ Finds Apparent Back Door to Rule 10
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2. (C) NASDAQ China Chief Representative Guang Xunxu (strictly
protect) told Econoff on December 12 that the "Rule 10"
restrictions on mergers and acquisitions, in place since
September 2006 (Refs A and B),are slowing down Chinese
companies who want to list on overseas stock exchanges. This
slow-down, however, has not dimmed NASDAQ's prospects for 2008
as there are currently 13 companies in the listing pipeline.


3. (C) Eleven of these companies had received permission prior
to September 2006 to form the special purpose vehicles (SPV)
overseas that allow them to list abroad. Two of the prospective
companies, however, had managed to form SPVs after the
implementation of Rule 10 by exploiting a loophole in Chinese
law. Guang explained that Rule 10 applies to the transfer of
management control of a Chinese company to non-Chinese. It does
not, however, apply to a transfer of company ownership. The
"back door" that these companies have exploited is to create
legal entities controlled by unnamed trustees in the British
Virgin Islands or the Cayman Islands to create holding
companies. These trustees then transfer their stock in the
holding companies to a listing company that becomes traded over
the counter. The listing company then buys the Chinese company
which is then able to transfer ownership of its assets to the
listing company under Chinese law. Guang said that the first
test of this loophole would be in March when Beijing-based
online company lists on NASDAQ.


4. (C) Prospects for new companies listing on NASDAQ beyond 2008
will depend on whether Rule 10 actually gets implemented and on
whether or not the Chinese authorities move to close the
loophole in the law that applies to management control, but not
ownership. Overall, Guang continues to be optimistic, he
emphasized.

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MOFCOM Main Source of Opposition
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5. (C) Guang said that the Ministry of Commerce (MOFCOM) was the
Chinese Government agency most opposed to allowing Chinese
companies to list overseas. His contacts at MOFCOM assert that
Chinese companies were being sold too cheaply to foreigners.
China Security Regulatory Commission (CSRC) opposition to

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allowing Chinese companies to list overseas was based on their
desire to have more companies list in China in order to
strengthen domestic markets and meet the massive investor demand
for good stocks.


6. (C) Guang noted that he have been the subject of harsh
criticism from Chinese securities firms and officials on the
Shenzhen Stock Exchange for his role in encouraging Chinese
companies to list overseas. "I've even been called an
imperialist-capitalist running dog and they weren't kidding!" he
exclaimed. "They are threatened by us and want to make it clear
we are not welcome," he said.


7. (C) NASDAQ is providing the CSRC with technical assistance
and know-how to assist with the creation of a third stock
exchange to be located in Shenzhen. This exchange is to be
modeled on NASDAQ and designed to give the small- and
medium-sized companies that do not currently meet China's
listing requirements an opportunity to go public.

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Chinese: Laundering Money, Buying Stocks
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8. (C) Guang, who has Chinese Government contacts and friends
dating back to the 1980s and 1990s, said that the People's Bank
of China (PBOC) has been very concerned with the "huge amounts"
of unregulated RMB that is flowing out of China through
non-official channels. The PBOC, apparently, feels that it is
in danger of losing control of China's money supply. This money
is being transferred out of China, largely via Hong Kong, so
that mainland Chinese can finance overseas investments, their
children's overseas educations, personal purchases, and savings.
Transferring money is apparently a simple process involving
depositing RMB at an office in Shanghai, Shenzhen or Guangzhou
and then collecting foreign exchange at an office in Hong Kong.
Money can also be wired from Hong Kong to any bank account in
the world, he said. On the other side of the transaction are
Hong Kongese and other foreigners who are anxious to obtain RMB
in China.


9. (C) Chinese investors in overseas stocks are mostly keen to
buy Chinese stocks that are listed on stock exchanges in the
United States and Hong Kong as they feel they understand the
market in China and can more easily track how their investments
are doing. Guang said there is even a brokerage company in New
York that accepts funds "via several cutouts" from the
laundering process described above and allows Chinese investors
to control their portfolio from China using an internet webpage.

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NASDAQ Beats NYSE In Race To Open Office, But Still Loses
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10. (C) NASDAQ and NYSE continue their competition for pride of
place in China (Ref C). Smarting from the NYSE having gotten a
jump on them in receiving CSRC permission to open its
representative office, NASDAQ opted out of sharing the spotlight
with NYSE at the December 11 ceremony presided over by Secretary
Paulson and Vice-Premier Wu Yi. Instead, Guang said, NASDAQ
International made a snap decision to open their office via
press conference on December 3. This allows them to claim that
they were first in China.


11. (C) Guang saw this move as a mistake since a pre-Strategic
Economic Dialogue opening ceremony with Secretary Paulson and
Vice Premier Wu Yi and the other officials and dignitaries in
attendance would have provided NASDAQ with "great face." This
face is important to Chinese company CEOs who are considering
listing overseas not always for the money involved, but also for
the prestige that comes from having listed.
JARRETT