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Oct 31, 2009

First foreign listing in China set for 2010

Shanghai stock exchange is to start accepting non-domestic listings in 2010 with companies such as HSBC and China Mobile at the front of the queue

There has been no definitive announcement, just a drip-feed of information from various business and political figures. But it’s clear that in 2010 the first overseas-headquartered firms will be allowed to list in mainland China on the Shanghai Stock Exchange.

IPO rankingsThe move has sent global blue chips scrambling for two main reasons: first of all, the Chinese market offers them access to a new and huge pool of liquidity. While US and European markets struggle to fund new listings, China has witnessed a run of multi-billion-dollar transactions. It is no surprise that two Chinese banks sit on top of the IPO value rankings for deals done in 2009 (see IPO rankings, right).

Secondly, and perhaps more importantly, a listing in Shanghai offers western firms a new way to brand themselves in the rapidly expanding Chinese market. ‘It is more a strategic question than a financial one,’ explains Anne Guimard, president of IR consultancy FINEO, who conducts capital markets training sessions for IR magazine in China.

Marketing ploy
Take NYSE Euronext, for example. Duncan Niederauer, NYSE’s CEO, revealed in February this year NYSE’s desire to be the first US company publicly listed in China. If it achieves its aim, NYSE will be well positioned to market a US listing to Chinese corporations.

NYSE is currently in negotiations with the Chinese Securities Regulatory Commission on exactly how a listing could take shape; it is understood the stock exchange hopes to list in Shanghai using a Chinese depositary receipt (CDR) program. Once it has completed the process, NYSE Euronext plans to help its constituents list in China in the same way.

Other global blue chips have also expressed interest. ‘We definitely want to do it,’ said HSBC chairman Stephen Green at the bank’s half-year results in Hong Kong. Since then, HSBC has confirmed hiring advisers to look into a listing but refuses to comment further. Market commentators, however, expect red-chip companies – state-owned Chinese firms that have chosen to incorporate abroad and list in Hong Kong, such as China Mobile and China National Offshore Oil Corporation – to be the first companies given a listing by authorities.

Mike Wong is CEO and chairman of the Chamber of Hong Kong Listed Companies, a couple of the members of which are working on a listing in Shanghai. He says the easiest way for Hong Kong-listed companies to gain a foothold is by spinning off an existing subsidiary that operates on the mainland. Listing in China will also help companies with their capital requirements if they require investment in renminbi, adds Wong.

The CDR route
At present, precisely how companies will list in Shanghai remains unclear. Crocker Coulson, president of CCG Investor Relations, a New York-based consultancy that advises Chinese companies listed in the US, says CDR programs will have to be structured differently from traditional American depositary receipt (ADR) and global depositary receipt (GDR) programs, due to the non-convertibility of the Chinese currency. ‘They wouldn’t be able to have a traditional, comparable ADR or GDR product without having a freely convertible currency, or an exception to the rules on that currency conversion,’ he comments.

Certainly the process will be closely controlled by the Chinese. Larry Chen, the Bank of New York Mellon’s (BNY Mellon) chief representative in Beijing, discussed the issue at a press conference in late September. He said BNY Mellon would probably advise Chinese banks on how to be a depositary bank, rather than take on that role itself, once the process was up and running. Details at this stage, however, remain sketchy.

What’s clear is that, at present, the Chinese authorities have little interest in relaxing their strict capital account controls. As a result, only issuers looking to make renminbi-based investment in China would benefit from tapping the mainland for capital.

The drip-feed of comments about Shanghai’s plans is typical of business in China: there is no grand announcement made or timetable set in place. Rather, officials take the cautious approach, ushering in changes step by step and closely monitoring the reaction both at home and abroad along the way.

And yet the decision to open up is an admission that China wants to do things differently. Shanghai has serious ambitions to become a global financial center and the internationalization of the Shanghai market is a key step along this road, exposing the city’s financial institutions and investor base to the practices of global companies.

‘One of the main concerns among many Chinese companies is that there is no truly clear process,’ points out Coulson. ‘It often comes down to political connections, and other means of getting in the queue – or ahead of the queue – are very non-transparent. In a lot of ways this will be one more step toward increasing professionalism and beginning a constructive learning curve for market participants.’

Possible issuers

Red chips: a number of Chinese companies chose to incorporate abroad and listed in Hong Kong. Being well known to Chinese investors, these would have the best chance of performing well in Shanghai. Being Chinese also puts them, many predict, at the front of the queue. Examples include China Mobile, China National Offshore Oil and Lenovo Group.

Global blue chips: banks like HSBC and the Bank of East Asia plus stock exchanges like NYSE Euronext and NASDAQ have shown strong interest in a Shanghai listing. The city is the center of the country’s wealth management industry and a burgeoning middle class offers plenty of opportunity for new business.

Blue chips from outside the financial sector have also shown interest. But some are skeptical about how much liquidity they will pick up in the Chinese market due to a lack of familiarity with their stocks among domestic investors. One large pharmaceutical firm based in Europe has cancelled its plans for a quote in Shanghai following research that showed it would see little trading activity there.

Cultural considerations
Listing in Shanghai requires a wider focus, says Robin Froggatt-Smith

A listing on the Shanghai Stock Exchange (SSE) will not, on its own, be enough to tap a Chinese market organized across Beijing, Hong Kong and Shanghai, and companies will have to understand this tripartite culture even if listings are approved. Beijing remains, for historic political reasons, the choice destination for regulatory and state-owned company headquarters. The China Securities Regulatory Commission (CSRC), the Chinese regulator, is based in Beijing, along with the State Administration of Foreign Exchange. Investment banks are also drawn to the capital, attracted by the chance to do business with the state-owned enterprises.

Shanghai is home to more commercial banks, including HSBC and the Bank of East Asia. When a bank performs more than one function, Shanghai is often the base for its asset management arm. The Hong Kong Stock Exchange (HKEx), meanwhile, remains an Asian center specializing in knowledge-intensive industries in contrast to the heavy industrial companies listed on the SSE. There is little reason to suspect that, in the immediate aftermath of China’s pending financial reforms, these identities will change.

Companies cannot simply break into the mainland Chinese market or strengthen their Asian profile by focusing on just one of the three cities. Although recent comment has been preoccupied with the SSE, cracking the Chinese market will require a sensitive three-pronged approach to make sure Chinese investors respond as desired.

Corporate sensitivity is the minimum requirement. NYSE Euronext is investigating along these lines by meeting with the CSRC in Beijing. Perhaps of greater concern, however, is investor loyalty to the HKEx with its established and attractive regulatory, administrative and taxation systems. The habits of the coveted Chinese market are supremely sensitive to the Beijing-Shanghai-Hong Kong combination. Corporate engagement throughout China should be a prerequisite, not a by-product, of a move to Shanghai.