Shanghai urged to act now on international board

The time is right for the Shanghai Stock Exchange to launch an international board allowing foreign firms to sell RMB-denominated shares, says director of its research centre, Hu Ruyin.

The idea was floated in 2009, although officials have yet to provide detail on the plans. But in an interview with AsianInvestor, Hu says it’s becoming urgent that authorities act now given the macroeconomic backdrop, with the renminbi appreciating and high domestic liquidity.

“Shanghai has set a goal to become an international finance centre by 2020. We are now in the middle of 2011, so we don’t have much time left,” he stresses, noting that among the world’s top 10 exchanges by market capitalisation, only Shanghai and Mumbai do not feature overseas listed companies.

Media in China have reported that the securities regulator is planning to permit about 10 foreign firms to list in a first batch, although the timing of a launch remains a mystery.

HSBC, Standard Chartered and Bank of East Asia are understood to be accelerating their preparations for listing, while a number of foreign-incorporated Chinese companies, or red-chips, are also pressing to return to the mainland stock market via an international board.

Arguing his case for action, Hu points out that an international board would have a very meaningful impact not just for Shanghai but for the country as a whole in terms of asset allocation.

As the world’s largest holder of US Treasury bills, China is incurring hefty losses as the US dollar depreciates against the renminbi. Further, government bonds denominated in yen and euro are not looking too clever now given the backdrop of fiscal deficit and, in the case of the eurozone, difficulty in coordinating fiscal policy.

“The international board, once fully established, will enable Chinese investors to achieve higher yields by holding shares of foreign companies [rather] than investing huge amounts of foreign reserves into low-yield government bonds denominated in depreciating currencies,” says Hu.

“The current situation is that we are buying assets denominated in depreciating currencies, while overseas investors are enjoying the fruits of China’s economic development by buying Chinese stocks listed overseas, such as red-chips and H-shares in Hong Kong,” he says.

The entry barrier for Shanghai’s international board has been stipulated and is exacting: companies must be listed on an international bourse and the jurisdiction they are registered in must have signed a memorandum of understanding with China. Companies’ market value must also be more than Rmb30 billion ($4.6 billion) and combined three-year net income above Rmb3 billion.

But Hu notes that an international board featuring such world-class companies would have a beneficial impact on China in terms of best practice in corporate governance, information disclosure and compliance – therein improving regulation and investor protection.

“These companies have already been through the selection process by investors in mature markets,” says Hu. “Having these companies listed in China, domestic investors will learn to make investments in a more rational way. All of the above will gradually bring China’s capital markets on a par with international standards.”

While concerns have been voiced that the advance of Shanghai will negatively impact Hong Kong’s status as China’s key international finance centre, Hu doesn’t see it that way.

China’s onshore markets need to be developed and Hong Kong cannot provide a home for the majority of its renminbi assets, he points out, noting that the total market cap of companies listed in Hong Kong is 12 times its GDP, compared with just 60% of GDP for China.

Rather, Hu expects the offerings of Hong Kong and Shanghai to complement each other, not to compete, and notes that China’s continued economic and financial market development is very much in Hong Kong’s interests.

“I believe one of the reasons international companies, such as Prada, choose Hong Kong as a listing destination is they see the great business opportunities the mainland brings to Hong Kong. In fact, it is a risk to Hong Kong if the mainland ceases to reform and open up,” he concludes.