Shanghai bourse gaining on Hong Kong

Blockbuster dual listings raise Shanghai’s profile

The Chinese have investment fever, and the mainland markets have been rising so fast – at least until the sharp dip in early June – that commentators like former Federal Reserve chairman Alan Greenspan have been warning of a speculative bubble. But the flood of huge new IPOs is expected to continue on the Shanghai Stock Exchange (SSE) despite efforts to cool the market. As the once moribund market shatters its own records, a growing number of companies that may once have listed only in Hong Kong are choosing to dual list both there and on mainland exchanges, or solely on the mainland.

The situation for the Shanghai exchange hasn’t always been so promising. After hitting a high in 2001, it suffered a four-year market slump, and the value of the shares listed fell by roughly half. In April 2005 the exchange placed a moratorium on new IPOs to give it time to convert state-owned companies into tradable shares. The market resumed full operation in 2006.

The Industrial and Commercial Bank of China (ICBC), the largest of the country’s state-owned lenders, was the first company to launch dual IPOs on both the Hong Kong Stock Exchange (HKSE) and the SSE. The effort was wildly successful, raising $21.9 bn, beating the previous world record of $18.4 bn, raised by a Japanese mobile phone company in 1998.

The market for dual-listed shares has been rising ever since. By the end of 2006 there were 37 companies dual listed on the HKSE, with prices set in Hong Kong dollars (H-shares), as well as the SSE or Shenzhen Stock Exchange, with prices set in yuan (A-shares).

The flood of IPOs from companies that would otherwise list only in Hong Kong is continuing. Citic Bank, China’s seventh-largest commercial bank in terms of total assets, floated its H-shares and Ashares in Hong Kong and Shanghai simultaneously in April, and its share price doubled in Shanghai on its first day. It was the world’s biggest offering this year.

The big attraction
Among the advantages to listing in Shanghai are lower listing fees. Phil Lisio, director of investor relations for Ogilvy Public Relations Worldwide, estimates that overseas listing costs for a Chinese company are about eight times higher, counting legal fees, listing dues and consultants.

But the biggest draw may be the more favorable domestic p/e ratios. ‘Shares in Shanghai trade at a significantly higher multiple than in Hong Kong or New York,’ says Crocker Coulson, president of CCG Investor Relations. ‘You can’t convert the currency and you’re not allowed to short, so there’s no way to do arbitrage.’

Many observers are questioning whether this momentum is sustainable, however. Almost 21 mn Chinese people have opened new trading accounts this year – four times the 2006 total – with many drawn by returns that dwarf bank interest rates.

Those Chinese retail investors are flooding the mainland markets with capital and creating a speculative frenzy that has little to do with the underlying fundamentals of many of the stocks they are investing in, experts say. By some estimates, Shanghai stocks are now valued at more than 40 times last year’s earnings and 30 times this year’s projected earnings.

In February, the Shanghai Composite Index tumbled 8.84 percent, rattling markets around the world. Though it quickly bounced back, many fear it is a shadow of a dramatic correction to come. ‘There’s a speculative frenzy going on,’ says Coulson.

Corrective measures
The government hopes efforts to attract more top-tier companies with good fundamentals will add stability to the market, says Siu-chan Kwan, director of Citigroup’s depositary receipts business in North Asia. ‘The market is very, very hot with a lot of liquidity, and the authorities in China are awfully concerned about it,’ he says. ‘They have been adopting some measures to slow down the momentum.’

Among those measures is a proposal to allow ‘red chips’ – mainland companies incorporated offshore – to raise capital in Shanghai in the second half of the year, Kwan says. Lenovo, the world’s third-largest PC manufacturer, is just one company planning to do so. ‘It is not really short on capital,’ Kwan concedes. ‘But if you are a large company in the country and you are also listed on the stock exchange, there will be a lot more publicity. For Lenovo, it would actually help it to market its products.’

Red-chip listings may be just the start. The Shanghai exchange is also reportedly in talks with London and Hong Kong-listed HSBC and other highprofile overseas companies that may list shares on the mainland. There are no major foreign listings yet as some technical issues need to be resolved. ‘We would love to be first off the rail,’ HSBC Asia’s CEO, Michael Smith, told the Shenzhen Daily in May.

Overall, the biggest factor to determine whether the Shanghai market’s emergence is sustainable may be the ability of the Chinese to set up an effective regulatory framework, most observers say – something they are still struggling to achieve.

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