Will S-chips go the way of Clob?

By R SIVANITHY

THERE are disturbing parallels between China stocks listed here (or S-chips, as they are known) and Malaysian stocks that used to be quoted on Clob International.

First, both were admitted into the local market because it was thought that Singapore stocks by themselves do not offer investors a sufficiently large critical mass. Clob was started in the early 1990s when the KL Stock Exchange decided to split with its Singapore counterpart and go its own way, while S-chips were brought in to fill the void created after Clob disintegrated 10 years later. Both were therefore born out of necessity to achieve size as quickly as possible.

Second, both had speculative but seductive stories to stoke investor interest: Clob's was a Malaysian infrastructure boom (that benefited the likes of Ekran, Idris Hydraulic and Renong, all companies that enjoyed huge local interest but no longer exist in their original form) and S-chips' was an emergent and roaring China (that benefited anything with 'China' or 'Sino' in its name).

Third and most worryingly, both became victims of a major crisis of confidence. In Clob's case, the trigger for a crash was the regional crisis of 1998 that exposed many companies as having weak (and, in some cases, non-existent) fundamentals, and this unfortunately coincided with a controversial Malaysian declaration that Clob was an illegal market. Massive losses were incurred and this created such deep distrust and disillusionment among local investors with Malaysian stocks that no moves have been made since then to revive the sector.

This, of course, then begs the question: with S-chips already suffering from massive investor distrust and disillusionment because of mind- boggling accounting irregularities, fraud and governance lapses, can the Singapore Exchange (SGX) really restore confidence in the sector? Or if the steps it takes are seen as being too little too late, will S-chips go the way of Clob?

First, though, it has to be said that to lay all the blame on SGX for the S-chip shambles would be unfair since it ignores the role played by the rest of the investment community, all of whom should be held equally culpable.

Underwriters, auditors, lawyers, sponsors, fund managers, dealers, remisiers and research analysts were all guilty of foisting Chinese junk onto the investing public. And if we were to be brutally honest, the public itself also played some part by swallowing the China story, ignoring warnings that mainly second-grade companies would choose to list here, and by chasing China stocks to record highs between 2005 and 2008.

However, SGX must bear a fair amount of responsibility because, although there are many similarities between the Clob and S-chip fiascos, there is a significant difference: unlike S-chips, Malaysian stocks on Clob were only quoted and traded but were not listed here, so they did not have to satisfy local listing rules.

Investors therefore bought and sold Clob stocks at their own risk, fully aware of the fact that there was no official implicit or explicit endorsement of quality. Investors also knew that Clob could have been closed down at any time, so trading was really based on 'caveat emptor'.

S-chips, on the other hand, were actively courted by an exchange which (on its website) states that it adopts an 'intelligent regulatory approach' which is 'an attractive consideration for companies striving to be recognised on good corporate governance and transparency'. It adds: 'In fact, a listing on SGX today bears a quality mark that is recognised internationally.'

So as far as investors are concerned, even though 'caveat emptor' applies when it comes to S-chips as well, there was a subtle but significant endorsement of some quality when a listing here was granted to a China company - an endorsement that was reinforced when several (at least 20, by our reckoning) were granted approved status under the Central Provident Fund Investment Scheme (CPFIS).

So far, the exchange's response to the S-chip scandals has been to ask audit committees to step up their internal controls and for companies to amend their Articles of Association to allow appointment and removal of legal representatives in China. Directors have been encouraged to keep a close eye on cash balances and receivables, and to practise good governance.

Papering over the cracks because it's too little too late? Possibly, though you'd have to say that instead of 'cracks', 'yawning fissures' is more apt given the alarming frequency with which fresh S-chip irregularities are surfacing. It's a bit like bolting the barn door after the horses have long fled (back to obscure provinces in China, no doubt).

SGX's main problem when trying to salvage confidence in its S-chips boils down to this: if Clob, which was not endorsed by the local authorities in any way could leave such deep and ingrained scars when it collapsed, what of S-chips - which are listed under a regime that subtly advertises quality and has granted many constituents CPF approved status?