Has IR breached the Great Wall? Mark Sharp finds out
It may come as a surprise to some that Chinese citizens are among the world's biggest savers, stashing away billions of renminbi in bank accounts nationwide. But this enthusiasm for saving has been ebbing in the past few years due to a government policy of low deposit interest rates.
The policy, which aims to encourage equity investment and boost China's stock markets, seems to be working. By the end of June 2000, personal savings in China totaled Rmb6.219 tn ($751 bn) - down 5.4 percent in six months, chiefly because of falling interest rates.
But are China's investors getting a good deal? Analysts often compare the Chinese markets to casinos. Wild rumors have found a new home in web chat rooms, which have proliferated as the popularity of the internet in the world's most populous country blossoms. Speculation and insider dealing are said to be rampant. As a result, many genuine investors, both retail and institutional, are put off from investing in China. Until the government slapped a ban on them, unofficial publications stuffed with bogus stock tips proliferated on the streets of Shanghai.
Most companies with listings on mainland markets float both A shares for domestic investors and B shares for foreign investors, denominated in renminbi and US dollars respectively. There are currently two major stock exchanges, in Shanghai and Shenzhen, though companies listed on the latter are gradually migrating to Shanghai to pave the way for Shenzhen to become a second board for nurturing high-tech companies. Seasoned China watchers expect the second board to take more than two years to come to fruition.
The concept of transparency is alien to many Chinese listed companies. Opaque might be a better description. Say 'public relations officer' in China and the image that springs to most minds will likely be that of a pretty girl handing out brochures at a trade show. Say 'investor relations' and the response is usually a blank stare.
Most jobs in IR are to be found in China's overseas listed companies in Hong Kong or New York, where firms are forced to adopt international standards to attract and retain shareholders. Domestically though, the pent-up demand for IR in China is massive. There are over 1,000 firms listed on the domestic mainland stock markets alone. But many companies, especially the loss-makers among the pack, may feel there are other more important ways of spending cash. Some companies may not want a bright light shining on their shady affairs.
Red chip reform
Alex Tang, head of research at stock brokerage Core Pacific-Yamaichi, has followed China shares for over a decade. He coined the term 'red chips' in the early 1990s after compiling the first index for Hong Kong-listed mainland Chinese corporations while at Dao Heng Securities. According to Tang, there has been a big improvement in the management of Chinese companies in the past five years. 'They are now being quite alert and quite sensitive to questions raised by investors,' he claims.
'In 1992, when we first compiled the index, red chips were still old-fashioned in terms of management style,' says Tang. 'They were concerned about the direction of China's economy and they were taking orders directly from the government in Beijing. Even the top management would be appointed directly by either provincial or city governments.'
But things began to change about five years ago, when the number of provincial and city government-owned companies listing in neighboring Hong Kong mushroomed, and they began recruiting professional personnel educated outside mainland China. 'They knew they had to upgrade their management skills and communications,' Tang says. 'They are quite sensitive to stock price movements now. When sensitive issues crop up they respond quickly. They're now thinking more about the benefits of dealing with investors, and setting up their own PR departments to deal with analysts and investors, devoted entirely to distributing corporate news.'
Tang cites Legend, China's biggest domestic PC manufacturer and brand and the winner of best Asia-Pacific company IR in the UK market at the last Investor Relations Magazine UK Awards. 'Legend has a whole IR team. They have done beautifully.'
Others are now publishing monthly or quarterly newsletters, updating investors, suppliers and customers with company news - unheard of ten years ago - and generally making sure they adhere to an improved standard of transparency when dealing with investors.
The real trigger for change was the memorandum of understanding signed by the Chinese and Hong Kong authorities in 1993, which enabled the first batch of mainland state-owned enterprises to list H shares (H for Hong Kong) on the Stock Exchange of Hong Kong.
This gave Chinese firms a window on the outside world, allowing them access to foreign capital for the first time. Before long, Chinese industries were listing N shares (N for New York), which helped force mainland companies to open their books to investor scrutiny.
No overnight fix
But while the concept of transparency in communications has been taken on board by companies with overseas listings, most domestically listed companies remain in the dark and show little interest in changing. Disclosure is not something Chinese companies are at home with; and IR development is likely to be a slow and initially half-hearted affair.
Alison Chow, CEO of irasia.com, says the online IR portal has a number of H-share clients, though mainland China is something of a black hole as far as membership is concerned. 'Anyone listed overseas would have to be aware of IR because that is the standard here. But with regard to domestically listed companies, the focus is not really there, it seems.'
Gary Ng, formerly responsible for IR at Hong Kong-listed Chinese manufacturer Guangdong Kelon, says, 'Chinese A-share companies are very much retail driven, with little or no institutional interest.' And, he adds, there is little to suggest change in the air. Ng reckons this will depend largely on the participation of overseas investors in the domestic markets. There has been much talk of merging the A and B-share markets, which could herald an increase in overseas institutional interest.
Another recent development Ng points to is the establishment of several mutual funds in China, launching an industry that could attract foreign financial services giants in the future. But before any institution will feel comfortable investing in domestically-listed companies, disclosure guidelines have to be established. 'Disclosure requirements might take a little more time,' Ng says. 'The authorities definitely want to do something, but it might take a little time to change the local mind set.'
One person who may help change all this is Zhou Xiaochuan, the new chairman of the China Securities Regulatory Commission (CSRC) and a man best known for his reformist tendencies. But even Zhou may have his hands full regulating China's volatile equity markets. In their short history, they have become notorious among investors for manipulation, speculation and insider trading, while the overall quality of Chinese listed companies often leaves much to be desired.
Another indication that China is serious about cleaning up its markets is the appointment of Anthony Neoh, a former chairman of Hong Kong's Securities and Futures Commission, as a senior advisor to the CSRC. The SFC in Hong Kong has a rock solid reputation and is highly regarded by its fellow regulators around the world.
Bright lights
If there is a ray of hope for the investor relations profession on the mainland, it may come in the form of new economy companies, according to Leslie Fung, a consultant with Golin/Harris Forrest in Hong Kong. As Fung points out, IR has only been taken seriously in Hong Kong for about ten years, so there's little wonder it's practically non-existent in mainland China which only opened its doors open to capitalism a few years ago.
'There's no pressure for companies listed on the domestic markets to really show any interest in IR,' says Fung. 'Internet companies like Sina.com are more proactive, because their underwriters are US investment banks such as Morgan Stanley, who may pressure them to do IR. Otherwise, the pressure may derive from the hunger for foreign capital.'
It may take time for China to turn on to investor relations. It's likely that it will be imported to the mainland over time by a younger generation of managers who have been educated overseas. This may introduce the concept of IR to China, along with the other modern management techniques that the country still badly lacks.