China's flawed system breeds IPO hush money

Launching an initial public offering in China has always been an expensive process, but has become even more costly recently as companies try to ease their path to market by bribing the media to quash any negative reports.

This practice of paying off the local press has become rampant in recent years, fuelled by the fierce competition for funding in China, where listings are still seen as a source of scarce and much-desired capital. Most of the illicit payments are made under the guise of a legitimate transaction.

“Placing a commercial advertisement is the preferred channel,” said one securities industry insider, who added that publishers are often as much to blame as issuers. “Sometimes the media extract an advertising contribution from companies preparing for an IPO by threatening to publish negative reports.”

All A-share listed companies are required to announce the progress of their share offerings on China’s three official securities journals — Shanghai Securities News, China Securities Journal and Securities Times. And these three publications play a crucial role in reporting news and information about issuers.

Companies can pay anything from hundreds of thousands to tens of millions of renminbi, depending on the extent of the company’s influence and its media relationships. This can greatly increase the cost of IPOs, particularly for smaller companies, and also distorts the information available to retail investors, who make up most of the participants in China’s stock markets.

No readily available data exists to illustrate the size of the problem, but insiders say it has become too serious for China’s securities watchdog to ignore. Officials at China Securities Regulatory Commission said recently that they plan to investigate IPO costs as part of their financial reforms, which should give them the opportunity to address the issue.

However, the root of the problem lies deep. China’s flawed financial system draws a blurry line between what listed companies can and cannot do, and Chinese society as a whole is largely ruled by rituals and customs, rather than laws, which means that some traditionally acceptable practices may not be entirely legal.

Faced with the threat of negative criticism, Chinese companies seem to take the view that paying off the press, while illegal, is an acceptable practice given all the other obstacles that stand in the way of a listing.

Finally, the only institution governing China’s media is the country’s propaganda watchdog, which focuses on making sure that the media is ideologically “healthy” and in line with the building of a harmonious society. The result is that China’s media has a tendency to put profit ahead of professional ethics.