Embracing an International Board

By WANG JUN

Embracing an International Board

By WANG JUN

A new international stock board will soon be established in Shanghai, allowing foreign companies to list their businesses and tap into the China market

ZhANG MING

China is moving closer to launching its own international stock board, a market for foreign companies to list their stocks in China, said Shang Fulin, Chairman of the China Securities Regulatory Commission (CSRC), at the Lujiazui Forum, an annual financial forum, in Shanghai on May 20, 2011.

In April 2009, the State Council published a document clarifying the target, roadmap and key measures to establish Shanghai as an international fnancial center. Setting up an international stock board, similar to those in New York City and London, is a key component of this strategy.

Since then, anticipation over the international board has been diffcult to contain, but the securities supervisor didn’t release any specifc timetable.

Yuan-denominated

The proposed international stock board will be denominated in yuan, said Tong Daochi, Director of the Department of International Affairs of the CSRC, at the Lujiazui Forum.

Tong’s statement settles the dispute on the denominated currency of the shares to be issued on the international board, which is a major issue in the system designing of the board.

At the Fourth Session of the 11th National Committee of the Chinese People’s Political Consultative Conference (CPPCC) held in March, He Qiang, a member of the 11th National Committee of the CPPCC and a professor at the Central University of Finance and Economics, suggested the international board be denominated in U.S. dollars.

A U.S. dollar-denominated international board, He said, can set up a “dollar pool” in China, which can alleviate the impact of “hot money” (speculative capital) and the pressure of China’s increasing foreign exchange reserves.

However, according toCaixin Century, a Chinese financial magazine, an industrial insider said the international board’s designers had reached a consensus that stocks issued in China by foreign companies would not be denominated in U.S. dollars, because that would require approval from many government departments of China and is related to the free convertibility of the yuan under the capital account of international payment, which is unfeasible now.

Also, the supervisor is still drawing up rules for the international board. Tong said related departments have been preparing rules for the international board, including laws and regulations and those meant to address accounting and settlement issues. The current rules are only rough drafts in need of further revisions, he said.

Ready and willing

Foreign companies with deep-rooted operations in China, such as HSBC Holdings Plc., Standard Chartered Plc., Bank of East Asia Co. and General Electric Co., have already expressed their interest in issuing shares on any future international board of the Shanghai Stock Exchange.

Helen Wong, President and CEO of HSBC Bank (China), said at the Lujiazui Forum that the company wants to be one of the first listed companies after the international board is launched.

“We expect the domestic securities market will become more open so that we will have opportunities to list here,” Wong said.

Peter Wong, Executive Director of Asia Pacifc of HSBC, said his company is ready for a China listing. HSBC has hired Chinese securities companies China International Capital Corp. Ltd. and CITIC Securities Co. Ltd. to help arrange its initial public offering in China when the time comes to fnally start selling shares.

International businesses like automaker Mercedes-Benz and private equity giant Blackstone Group have all shown an interest in listing once an international board is up and running.

A double-edged sword

An international board is a necessary step to improving the domestic capital market system, said Huang Tingyi, senior investment consultant of Ping An Securities Co. Ltd. It is also more conducive to providing more channels for investors, resolving investment risks on the A-share market and facilitating connection between the A-share market—China’s main board—and the international capital market.

Fu Yongchong, investment consultant of Datong Securities Co. Ltd., said under the present background of turbulent hot money from all over the world and growing interest rate in China, the international board may serve as part of the “pool” to enclose the hot money, alleviating the impact of transnational capital upon Chinese stock market, real estate market and the real economy. Hence Fu thinks the launch of the international board is benefciary to stabilize the overall economy in China.

However, an international board also presents a puzzling situation for industrial insiders who worry that the A-share market, now depressed, is likely to face even more pressure after the launch of the international board.

Fu said such pressure will be directly reflected in liquidity related to the A-share market. Since the A-share market is denominated in the yuan, a yuan-denominated international board will divert some capital from the main board. After making comparison between world top 500 companies, some of which will be listed on the upcoming international board, and the Chinese listed companies in the same industries, investors are quite likely to abandon A-share companies and choose to invest in the international board.

CNSPhOTO

Han Hao, strategic analyst at China Minzu Securities Co. Ltd., said evaluating stocks on the international board presents other problems. In the A-share market, valuation of the listed companies’ stocks is higher than in international markets, which means prices of stocks from the same company issued in China are higher than those in international markets.

If the international board adopts the valuation standard in the A-share market, stocks of foreign companies issued in China will be more expensive than those in international markets, which will be diffcult for investors to accept.

If valuated by the same standards as the international markets, stock prices on the international board may be much lower than those in the A-share market, which foreign companies are reluctant to see, and this will in turn pull down the valuation level of the A-share market.

Launching an international board, Han said, may further curb the stock price index of the A-share market. This premature panic has already been refected on the stock price index. On May 23, the frst trading day after Shang’s words at the Lujiazui Forum, the Shanghai Stock Exchange Composite Index dropped 2.93 percent, the biggest drop on a single day in the past three months.

These fears are unnecessary, said Du Zhengzheng, macroeconomic analyst of Bohai Securities Co. Ltd. When the small and medium-sized enterprise board and the growth enterprise board were launched, market worries of diverging capitals from the main board were rampant, but once launched the two boards didn’t have as profound an impact as predicted. Today, major factors curbing the stock price index are the macro economy and inflation expectations, not a prospective international board.

Learn from Japan

Simply launching the international board cannot ensure its success, despite the enthusiasm shown from businesses looking to list and investors looking to commit their fnancial resources. Chen Lu, Assistant Director of the Research Institute of Haitong Securities Co. Ltd., in an article forChina Financemagazine, suggested China develop a roadmap based on the failure of Japan’s board in the 1970s on how to create and maintain an international board.

In 1973, Japan adopted a floating exchange rate mechanism putting financial liberalization reform into full gear. That same year, the Japanese Government allowed foreign companies to issue stocks in the country’s securities market. Even so, foreign companies listed in Japan were few. In 1980, only 15 foreign companies were listed in the Japanese stock market.

Only after Japan began to deepen fnancial liberalization in 1985 did the Tokyo stock market see an infux in foreign companies ready to list. By 1991, there had been 129 foreign companies listed, most of them transnational giants from Europe and the United States.

The economic bubble burst later in the 1990s effectively stifled Japanese investors’interest in foreign companies. The feeling from the foreign businesses was mutual as many began to delist from the Tokyo Stock Exchange. At the end of 2003, there were only 23 foreign companies still listed in Japan.

Thecoup de gracecame in 2004, when Tokyo closed the foreign trading board of its stock exchange, transferring stocks from foreign businesses, which used to be traded separately from Japanese stocks, to the frst and second boards of the exchange. These boards of Tokyo Stock Exchange traditionally trade stocks of large and medium-sized companies respectively.

According to Chen, excessive listing requirements, strict market supervision and high listing charges led to Japan’s failure to maintain an international board. The stagnant economy following Japan’s economic bubble burst in the 1990s only solidifed the Japanese market as pariah arena for foreign companies.

“China should learn from the failure of the Japanese international board. Only an economic system with stable capital returns can form a virtuous circle of capital fow, and only an effective but low-cost financial supervising mechanism can protect the interests and enthusiasm of the investors. These two points are most important to the success of the international board,” Chen said.