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RR RUEHCN RUEHGH
DE RUEHGH #0481/01 2130954
ZNR UUUUU ZZH
R 010954Z AUG 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 6097
INFO RUEHBJ/AMEMBASSY BEIJING 1309
RUEHCN/AMCONSUL CHENGDU 0804
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0784
RUEHHK/AMCONSUL HONG KONG 0922
RUEHSH/AMCONSUL SHENYANG 0806
RUEHIN/AIT TAIPEI 0643
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHUL/AMEMBASSY SEOUL 0090
RUEHGP/AMEMBASSY SINGAPORE 0065
RUEHKO/AMEMBASSY TOKYO 0169
RUEHGH/AMCONSUL SHANGHAI 6539

UNCLAS SECTION 01 OF 02 SHANGHAI 000481 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/ALTBACH/READE 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN 
FRANCISCO FRB FOR CURRAN; NEW YORK FRB FOR CLARK/CRYSTAL/MOSELEY 
CEA FOR BLOCK 
USDOC FOR ITA/MAC DAS KASOFF, MELCHER AND MCQUEEN 
TREASURY FOR ADAMS, AND OASIA - DOHNER/BAKER/CUSHMAN 
TREASURY FOR WRIGHT AND AMB HOLMER 
NSC FOR WILDER AND TONG 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV CH
SUBJECT: HAITONG'S BACKDOOR LAUNCH INTO THE MARKET 
 
REF: A. SHANGHAI 334 
 
     ¶B. SHANGHAI 478 
 
(U) This cable is sensitive but unclassified and for official 
use only.  Not for distribution outside of USG channels or via 
the internet. 
 
¶1. (SBU) Summary: Haitong Securities became the first securities 
company to list via a backdoor listing in China, on July 31, 
after it completed a reverse takeover of Shanghai Urban 
Agro-Business.  It was forced to use a backdoor listing since, 
on its own, it did not meet Chinese listing requirements.  Other 
securities firms are in the pipeline to follow Haitong onto the 
market through backdoor listing as they hope to raise funds 
necessary to make them competitive with the inevitable entry of 
more competitive international firms.  End Summary. 
 
¶2. (SBU) Econoff and Economic Assistant attended the Haitong 
Securities Company's listing ceremony on the floor of the 
Shanghai Stock Exchange on July 31.  Haitong is the third 
securities firm to list in China and the first to do so via a 
backdoor listing.  (Note: Hong Yuan Securities listed in 1994; 
Citic Securities Co., one of the country's biggest brokerage 
firms, listed in 2002.)  On Haitong's first day of trading, it 
declined 6.7 percent from its initial price of 56.01 to 51.65. 
(Note: See Ref A for a report on Finatt's meeting with Haitong 
Securities on May 16). 
 
¶3. (SBU) At the listing ceremony, Haitong Securities Company 
International Business Department General Manager Liao Rongyao 
and Haitong Securities Director Wu Bin said  Haitong intended to 
use the money it raised on the capital markets to expand its 
business.  It hoped to acquire several smaller securities 
companies and develop its stock index futures portfolio (Ref B). 
 Wu also said that being a listed company would enhance 
Haitong's corporate image and increase public awareness of the 
company. 
 
--------------------------------- 
Mechanics of the Backdoor Listing 
--------------------------------- 
 
¶4. (SBU) Z-Ben Advisors Principal Peter Alexander, in a separate 
meeting on July 28, told Econoff that Haitong effected its 
backdoor listing by purchasing Shanghai Urban Agro-Business 
Limited.  Shanghai Urban was a listed company owned by Shanghai 
Municipal government's Bright Foods Group.  To effect the 
transaction, Shanghai Urban transferred all of its assets and 
liabilities, including retired employees, back to its parent in 
exchange for 756 million RMB (USD 100 million).  Before this 
backdoor listing was announced on October 16, 2006, Shanghai 
Urban's stock was worth 6.38.  Following the announcement of 
Haitong's intended reverse takeover, trading of Shanghai Urban's 
stock was suspended until January 5 when it reopened at 6.38 RMB 
per share.  It had risen to 56 RMB per share as of July 31, on 
investor's anticipation of the takeover. 
 
¶5. (SBU) Haitong's Wu told Econoff that the procedures and 
regulations governing controlling backdoor listings were "not 
very clear and very complicated."  He noted that Haitong had 
been forced to deal with many different regulators at the same 
time as they attempted to discern what information was required 
and how Haitong should proceed. 
 
¶6. (SBU) Haitong, opened in 1988, was one of three securities 
companies owned by the Shanghai Municipal government.  Shanghai 
also owns the Shenyin Wanguo and Guotai Junan securities firms. 
According to Wu, Haitong had initially been owned by the 
Ministry of Finance and was transferred several years ago from 
the Ministry of Finance to the Shanghai government. 
 
¶7. (SBU) Haitong's Liao said that Haitong had initially targeted 
 
SHANGHAI 00000481  002 OF 002 
 
 
a Shenzhen-listed company called the Liulu Industrial Company. 
(Note: Liulu is a company under the direction of PetroChina that 
has yet to undergo share reform.  End note.)  Liao said that the 
Shanghai government had objected to Haitong's "moving out of 
town" and provided a list of six ailing Shanghai 
Government-owned listed companies for Haitong's "consideration." 
 One of these was Shanghai Urban. 
 
--------------------------------- 
Back(door Listing) to the Future? 
--------------------------------- 
 
¶8. (SBU) Z-Ben Advisors Alexander noted that several other 
Chinese brokerage firms, such as China Merchants Securities Co. 
and Guotai Junan Securities Co. are also preparing to launch 
initial public offerings via backdoor listings.  Many of these 
companies have already started the process of purchasing listed 
shell companies.  Backdoor listings provide the only method for 
Chinese securities firms to list due to the Chinese Securities 
Regulatory Commission's listing-requirement that companies have 
three years of profitability.  Securities firms, who up until 18 
months ago had suffered through China's five bear market, did 
not meet this qualification.  According to Alexander, Chinese 
securities firms were hoping to go public as soon as possible so 
that they could raise funds to prepare themselves for what many 
see as the inevitable entry of more competitive foreign 
securities firms. 
 
------- 
Comment 
------- 
 
¶9. (SBU) Attending the ceremony and providing official blessing 
was Shanghai Vice Mayor Yang Dinghua.  In her remarks, she said 
that Haitong's listing was another step towards insuring 
Shanghai's place as an international financial center. 
Shanghai's interference in helping Haitong "select" a 
Shanghai-owned and -listed company demonstrates the lengths to 
which municipal governments will go to protect and promote its 
own during mergers and acquisitions.  Shanghai Stock Exchange 
Executive Vice President referred to Shanghai's stock exchange 
as "The Shanghai Financial Stock Exchange" on July 27 (Ref B) 
because financial services companies account for 80 percent of 
the value on the market.  Indeed, Shanghai's reputation as an 
international financial capital and the success of the Shanghai 
stock market appear to be increasingly interlinked. 
SCHUCHAT