Why Don't Chinese Companies Like Chinese Investors?

BEIJING (TheStreet) -- Chinese Internet investors are starting to feel like pimply teen-agers who never get invited to parties.

They've been left behind three times over the past two months with announcements that some of the country's biggest up-and-coming Internet players are planning IPOs in the United States.

Chinese microblog operator Sina Weibo  (SINA) e-commerce giant Alibaba and online retailer JD, which recently got financial backing from social networking powerhouse Tencent TCTZF, have all chosen to party in New York rather than with Shanghai or Shenzhen investors.

These latest IPO hopefuls want to follow in the footsteps of Tencent, Chinese web portal Sina, search engine Baidu (BIDU) and social networker Renren (RENN), each of which shunned the mainland's stock exchanges a long time ago. Sina listed in New York in 2000, Baidu in 2005 and Renren in 2011. Tencent listed in Hong Kong in 2004.

Meanwhile China's retail investors, whose access to overseas markets is severely restricted by Beijing authorities, have been forced to chase moneymaking options with domestic companies on lower rungs of the Internet industry ladder.

These small-scale but sometimes lucrative opportunities include domestically listed shares in software developers, online gaming companies, advertising firms and electronics suppliers too small to seek overseas listings.

Shares in companies popular among China's throngs of young, online gamers such as ZQGame and 37wan have seen share prices rise modestly in recent months. A standout is game developer Ourpalm, whose stock value has climbed 30% since October.

China's software development firms as a group have seen their Shanghai and Shenzhen exchange share prices climb about 20% since January, according to a recent report in China's Securities Times newspaper.

Chinese retail investors also like online banking-investment firms such as Sinolink Securities, which touts itself as a Chinese version of Charles Schwab (SCHW) and whose share price has jumped 80% since November. Other popular targets include regional publishers with growing Internet units such as Chengdu B-Ray Media, which in January bought an Internet service provider in Beijing called Manyougu Information Technology.

But the range of investment opportunities is narrow. The Shanghai and Shenzhen stock exchanges have officially categorized only 13 listed companies as providing "Internet and related services." And only 108 on the two markets combined are called "software and information technology" companies.

Indeed, government restrictions prevent retail investors from directly buying stakes in the Internet companies that matter most in China. Thus, a mainland investor who uses Baidu every day cannot directly trade the search engine's stock.

Retailer investors seeking overseas-listed shares are legally required to buy through special funds under the government-supervised Qualified Domestic Institutional Investor (QDII) program, which started in 2006.

As of February, the government's State Administration of Foreign Exchange said, the 119 domestic funds allowed under  the QDII scheme had received Beijing's permission to invest more than $86 billion in overseas equities markets. Most of these funds are run by state-owned banks and securities firms.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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