The second coming of S-chips is different

REGULATORS here have reportedly been working with their Chinese counterparts to bring China companies to the local market as secondary listings.

This will be the second time China stocks would make their appearance here, after their first in the late 1990s, a period known today as the unfortunate “S-chips saga”. The term has also become synonymous with failure on every front.

This time round though, there is every reason to hope things will be different.

The root cause of the original S-chips saga was – and still is – the need for the local exchange to build size and scale comparable to other markets despite having only a relatively small domestic economy on which to tap.

This first became obvious in 1989 when Malaysian authorities decided that the joint Kuala Lumpur-Singapore stock exchange which operated at the time should be dismantled and that Malaysian shares should be traded solely in KL.

Faced with the unpalatable prospect of losing several hundred stocks and therefore a sizeable chunk of the market overnight, local regulators decided to continue trading about 200 mainly speculative Malaysian counters on an over-the-counter segment of the Singapore market known as Clob International from 1990 onwards.

This was possible because trading back then was scrip-based, meaning ownership was represented by physical paper certificates (scrips) rather than electronic records. As long as the shares were physically present on this side of the Causeway, trading could proceed on Clob.

Malaysia did not welcome this move and spent years trying to shut down Clob, eventually succeeding in 1998 during the height of the Asian financial crisis.

During the S-chips saga, the response again was to try and quickly build sufficient size, this time with China stocks or S-chips from 1999 onwards. This was an appealing enough proposition given China’s nascent rise as an economic superpower but one that ultimately proved ill-conceived as there were insufficient protections in place.

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By 2008, poor corporate governance, opaque financial reporting and an influx of companies with lousy fundamentals and limited regulatory cooperation led to a wave of accounting scandals, outright fraud and a complete collapse of the segment.

Now, in what is effectively a third attempt to add mass to the local market, the Singapore Exchange is again exploring the possibility of attracting Chinese companies, but this time the strategy is far more targeted.

Instead of small and relatively unknown firms seeking primary listings, the focus is on established Chinese companies pursuing secondary listings here. Many of these firms are already listed in major markets such as Hong Kong, Shanghai or Shenzhen.

This shift alone addresses a key weakness of the original S-chip wave because companies already listed in recognised exchanges must meet the disclosure and governance standards of those markets. They have operating histories, analyst coverage and investor scrutiny that were often absent among the first batch of S-chips.

Furthermore, the size requirement that the new wave of S-chips must have a market cap of at least S$1 billion and raise at least S$200 million or 10 per cent of their market cap (whichever is lower) means that the market will impose a layer of discipline in addition to regulatory oversight.

All told, it looks like the second coming of S-chips, or the third attempt in 36 years to build scale, should prove more successful than before.