China Takes Stock

The “Amazon of China” will soon be a publicly traded company–but not in its home country. JD.com, an online retailer with more than $16 billion in annual sales, is planning to debut this year on a major American stock exchange. It’s one of as many as 30 Chinese firms expected to make the move in 2014, up from eight last year.

For U.S. investors, it’s all about growth potential. Most of the reported initial public offerings are for Internet companies, which are positioned to profit from China’s booming online population (on track to rise to 800 million from 600 million over the next year, according to Chinese-government estimates). For the Chinese companies, listing in the U.S. offers an escape from strict Chinese regulations like the one that caps first-day price gains at 44% above the IPO price.

But there are risks. Because Chinese law prohibits companies from fully opening their books to foreign parties, it’s difficult for the U.S. Securities and Exchange Commission to investigate fraud cases. In 2011 several Chinese firms were delisted from U.S. exchanges because of accounting irregularities; the following year, just two Chinese firms went public in the U.S.

Since then, however, the SEC has tried to increase transparency, and the market has rebounded. In 2013, five of the eight Chinese companies that went public in the U.S. managed to double their IPO price by the end of the year. “U.S. investors care a lot about growth and margin potential,” says Brewer Stone, managing director of international investment banking at Pacific Crest Securities. “China has been delivering that over the years and is delivering it increasingly now.”