Almost 90 years after the founding of China’s Communist Party, could we be about to see the flourishing of a new relationship with foreign capitalists? It would be a symbolic moment, given that foreign companies were chased out of China in 1949. But the prospects for an international board in Shanghai – upon which international companies could list – now look very promising indeed.
In fact, the idea has been mooted for years. But at a recent forum held in Shanghai’s Lujiazui financial district, the chairman of the CSRC gave the strongest indication yet that the proposals will soon become a reality.
Shang Fulin, standing next to Shanghai’s Party Secretary Yu Zhengsheng, told an audience of bankers: “Here, I want to tell you that we are getting closer to the launch of the international board.”
The regulator did not put a timeline on the move. But it will mean Chinese investors could soon be buying shares in foreign firms via a renminbi-denominated listing in Shanghai. Companies such as Coke, Walmart and Unilever are reckoned to be potential candidates, although the foreign entity most widely predicted to be first to list is HSBC.
One reason for pause: China’s A-share investors reacted negatively to Shang’s announcement. Shanghai’s stock index fell 2.93% the next day, and dipped below the psychological 2,800 level. Century Weekly explains: “The market interprets the news of the international board’s coming as the fuse that will see a stock market crash.”
The worry is that if Chinese investors suddenly have access to blue chip foreign names, they’ll divert funds from the rough-and-tumble of the A-share market, where the quality of listed companies is deemed to be much lower.
Li Cong, an analyst with Huatai United Securities, says the market also fears new listings by foreign firms will “increase the supply of shares, causing downward pressure on local stock indices”.
That’s a problem, given the A-share market is currently one of the worst performing markets. The Shenzhen A-share index is down 15% so far this year and the Shanghai A-share market is trading on a 12 month forward PE ratio of just 11.1 times, or 40% below its five-year average.
So what happens next? HSBC’s equity research team put out a recent report suggesting investors take a “prudent” attitude to news of an international board. Its strategist Steven Sun (interviewed in WiC92) has identified 50 companies he thinks could list between 3-5% of their total outstanding shares in Shanghai.
According to Sun: “Our estimates put the amount of capital raising by international board listing candidates in the range of Rmb110-190 billion per year (i.e. as much as $29 billion annually) for the coming decade, which is fairly sizeable.” He says it equates to 16% of the total equity offerings conducted in the A-share market or 3.6% of incremental household savings in 2010.
Alongside this huge influx lies the board’s greater purpose. Economy and Nation Weekly says its introduction will “be a substantial step towards the internationalisation of China’s capital market and add an important weight to the building of Shanghai as a financial centre.” It will also allow Chinese investors to diversify their savings into a more ‘global’ asset class (i.e. multinationals). Plus the funds raised will be used by companies to expand their operations within China itself, aiding economic growth.
But will the international board really live up to its name? Ironically, its biggest users may be red chips: Chinese firms that are already listed overseas, typically in Hong Kong and New York. Some of China’s most prominent companies are red chips – like China Mobile, CNOOC and Lenovo – and the Shanghai Stock Exchange calculates there are 407 of them listed on foreign exchanges. Century Weekly points out that they could be very keen to return to a domestic listing, and may become a driving force in the proposed board’s growth.
Patriotic sentiment may even mean that some of these big Chinese firms get into the listing queue in front of the foreign multinationals.
Economy and Nation Weekly sounds a cautionary note on the international board too, looking back at the launch of the growth board ChiNext in Shenzhen two years ago (see WiC84). Although it was eight years in the planning, ChiNext has shown mixed performance, not least because many of the companies selected to list have been of “uneven” quality. Rather than rush ahead, regulators would do better to learn from ChiNext’s mistakes, the newspaper warns.
In reality, ChiNext’s growing pains are unlikely to delay Shanghai’s plans. For one thing, city bosses are determined to bolster Shanghai’s claim to financial hub status. And for another, they’ll argue that the heavyweight candidates prepared to debut in Shanghai bear little comparison with the minnows starting out in Shenzhen.
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