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New York investors lost another China play last week, when former IT outsourcing high-flyer Camelot Information Systems (NSYE: CIS) formally completed a privatization that will result in the imminent de-listing of its shares on the New York Stock Exchange (company announcement). Camelot was just the latest in a steady stream of Chinese firms to recently abandon New York, where their shares stagnated for years due to lack of investor interest.

New York's losses could easily become China's gains, as many Chinese investors might like to buy shares of these locally based companies that are both profitable and have strong growth potential. But a number of obstacles at home have prevented Camelot and many other companies from re-listing in China. Most notable among those is the securities regulator's strong bias to state-run companies. The regulator should take more steps to remove that bias and welcome these entrepreneurial private companies to list back at home, giving local investors of an important new option to reinvigorate the nation’s moribund domestic stock markets.

Camelot is the latest but hardly the first Chinese company to privatize over the last 2 years, amid a broader exodus of many smaller companies from the Nasdaq and New York Stock Exchange. Many of the departing firms are profitable and growing at respectable low double-digit rates. But they have been overshadowed by bigger Chinese names like Internet search giant Baidu (Nasdaq: BIDU) and e-commerce firm Vipshop (NYSE: VIPS), which are growing much faster, sometimes at triple-digit rates.

Camelot was once a Wall Street darling, as investors purchased its shares on big hopes that China could become a major center for production of outsourced software. It listed its shares in 2010 and quickly saw them rise to more than $25 on those hopes. But investors began to lose interest in the company in 2012, as its growth slowed and a series of accounting scandals undermined confidence in U.S.-listed Chinese companies. Camelot's shares sank below $4 at that time, and have traded at that level ever since.

The company is just one of many Chinese names to abandon U.S. listings due to lack of investor interest. Camelot's biggest U.S.-listed rival, Pactera (Nasdaq: PACT), is also in the process of privatizing and is also likely to de-list in the next month. Former online game leader Shanda Interactive kicked off the trend nearly 2 years ago, and has been followed by other faded high-flyers including advertising specialist Focus Media, drug maker Simcere Pharmaceutical and telecoms software maker AsiaInfo.

None of the newly privatized companies have said what they plan to do next. But most of the deals have been funded by short-term private equity buyers, meaning many companies are likely to either get sold or try to re-list on other stock exchanges over the next 5 years. China would be an ideal place for such re-listings, since this kind of entrepreneurial, privately-owned company is currently nearly non-existent on the nation's 2 main stock exchanges and would almost certainly be welcome by local investors.

And yet securities regulators have done little to roll out a welcome mat for these New York orphans. The nation's Nasdaq-style ChiNext stock exchange, which was supposed to attract entrepreneurial, high-growth companies, has instead become famous for volatility and questionable quality of many of its listed firms. Meantime, the securities regulator's longtime bias towards state-run companies means that entrepreneurial, privately-owned companies are nearly non-existent on the country's 2 main boards in Shanghai and Shenzhen.

The securities regulator has been working for years on plans for a Shanghai-based international board for companies that are incorporated overseas. Such a board would be ideal for many of these newly privatized companies, since nearly all have incorporated offshore as part of their original New York listing process. Yet the international board has been delayed for years due to current weakness in domestic stock markets, and the plan has been largely mothballed for now.

China's securities regulator should seize on the recent wave of New York de-listings and take more steps to attract these companies to list back at home. Important measures could include reviving the international board plan and removing its bias against toward state-run firms. Its failure to welcome these companies means that shares of some of China's most valuable companies, including Internet giants like Tencent (OTCPK:TCEHY) and Alibaba, will remain available only to foreigner buyers but inaccessible to investors in their own backyard.

Bottom line: China should take more steps to court private firms de-listing from New York, in a bid to provide more and better quality investment options for domestic stock buyers.

Disclosure: No positions

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: China Should Woo Camelot, Others In Privatization Wave