Positive signals for an international board on the Shanghai Stock Exchange point to a nearing launch. But major obstacles remain.
A growing din within financial circles suggests China’s proposed international board for foreign company stock trading is on the runway and approaching takeoff.
On September 8, Commerce Minister Chen Deming said at an investment conference in Xiamen that China would indeed allow listings by qualified foreign invested companies on mainland exchanges.
The same day, CITIC Securities International Chairman Ted Tokuchi said at a Caijing conference that if the Chinese stock market remains stable, a first draft for board listing rules could be released after China’s national holidays in early October. The news drove the A-share Shanghai Composite Index up 1.7 percent to close the day at 2930 points.
One or two foreign companies are expected to list through the board on the Shanghai exchange early next year, announced Fang Xinghai, director of the municipal Shanghai Financial Office, while describing Shanghai’s effort to build a new trading platform during a London visit in mid-September.
In another positive signal, Caijing learned that the China Securities Regulatory Commission (CSRC) has set up a working group under CSRC Vice Chairman Yao Gang that’s specifically dedicated to the task of building an international board.
At the Shanghai exchange, General Manager Zhang Yujun is in charge of a separate working group preparing for the board’s launch. And it’s been confirmed that the yuan will be the currency for all trades.
Nevertheless, several key issues remain unsettled. Yet to be decided are questions about accounting standards, listing requirements, share sale limits, and rules governing how raised funds can be used.
Indeed, there are plenty of controversies that could affect the launch of the international board, for which an official target startup date has not been announced. At worst, unsettled issues could park the project on the runway.
Longing to List
Tokuchi said up to six foreign companies have shown interest in listing on the Shanghai exchange. These include the banks HSBC and Standard Chartered, and the stock exchange NYSE. “It is very likely that they will list in the next two to three years,” he said.
Responding to a recent rumor that a red chip company would list on the Shanghai market this year, Tokuchi said that listing may be delayed until 2010. But he said the first company to list on the international board probably will be a red chip company.
A source tied to regulators told Caijing that a stable stock market could lead to a speed-up in preparations for red chip stocks now trading in Hong Kong to join the A-share market. Reportedly, these would include China Mobile and CNOOC.
Tokuchi predicted two to three companies, including red chips and foreign invested companies, would list on the Chinese stock market next year. Over the next five to six years, 20 to 30 companies will list. And within 15 years, he said, more than 100 mature companies will have listed on the Shanghai exchange.
According to Tokuchi’s analysis, foreign companies willing to list in Shanghai are mainly multinationals with fairly big stakes in China. Companies such as NYSE and HSBC aim to further integrate China into their global strategy maps.
However, some foreign companies are quite reserved about listing in Shanghai. Key reasons include listing requirements, fund-raising target rules, share price differences and delisting requirements.
Step By Step
The public first heard an official proposal for opening an international board in April 2007, when the Shanghai Stock Exchange released a Market Quality Report suggesting a new way for overseas companies to issue A shares.
CSRC released a draft regulation for a pilot program a month later, allowing overseas red chip companies to list on the A-share exchange. But for various reasons, the red chip A-share return plan was postponed two years.
Two years passed before the State Council confirmed that Shanghai would be promoted as an international center for finance and shipping – a move that brought the idea of an international board back to the table. After that, for the first time, CSRC and Shanghai exchange officials added the international board concept to the government’s working agenda. Last May, exchange chief Zhang publicly called for steadily advancing preparations for the international board.
Tu Guangshao, deputy mayor of Shanghai and former CSRC deputy chairman, later said overseas companies should be given access to the A-share exchange as part of the city’s long-term goal to build an international financial center.
Some technical issues, such as what kind of accounting standard should be used, market pricing and whether companies on the international board should be required to invest in China, are still being discussed.
Industry professionals say it’s unrealistic to require companies to comply with certain Chinese bookkeeping rules. “It is too costly for an international company with assets all over the world to comply with Chinese auditing standard,” said Zhu Junwei, general manager of capital markets with UBS Securities.
Changing to Chinese from international accounting could cost a company from US$ 5 million to more than US$ 10 million. “This is not even a one-time charge,” Zhu said. “Every year, a listed company would have to pay auditing fees.”
A senior executive at a securities firm, who asked not to be named, said international board listings should not follow in the footsteps of so-called panda bonds — yuan-denominated bonds issued by foreign companies in China.
Friction was apparent in October 2005 when International Finance Corp. (IFC) issued 1.13 billion yuan in pandas, and the Asia Development Bank used the bonds to raise 1 billion yuan. Both offered the bonds on interbank markets.
Neither issuer would accept a Chinese regulation requiring panda bonds to comply with Chinese accounting standards. After lengthy negotiations, IFC and the bank were exempted from the accounting rule and allowed to follow international credit rating and accounting standards. But they paid a price: Their bond offers were postponed several times by regulators.
Zhang recently told Caijing, “Listed companies on the international board should comply with Chinese regulations.” But he also noted that, as the nation’s corporate and securities laws currently only apply to domestic companies, the legal framework should be restructured for foreign companies that want to list A shares.
Other technical challenges surround IPOs. Lou Gang, a China strategist with Morgan Stanley, said launching an international board would test the current system for launching IPOs.
“With too much intervention by the government, listing access has become an asset,” Lou said, adding that the current review and approval procedure has become an obvious obstacle.
China could learn from its neighbor Japan, which set up an international board in the 1980s. By 1991, up to 131 foreign companies had listed on the Tokyo Stock Exchange.
Later, with the collapse of an asset bubble, many foreign companies delisted. And in April 2004, the Tokyo exchange canceled its foreign division. It then gave foreign and domestic companies equal rights and status.
Chen Changjie, an attorney with local law firm Guangda, said Japan’s international board failed due to a complex, tedious review and approval process.
Another issue for architects of a Chinese international board is that the proposal has intensified competition between Shanghai and Hong Kong.
“This affects the status of Hong Kong and Shanghai, and which one is more important,” said a Beijing-based securities executive. “In the environment, in which the yuan currency is not exchangeable, Shanghai can hardly be called an international financial center.
“All these issues are not easily resolved in the short term,” said Lou. “So the international board does not present a rosy picture.”
Source: Caijing Magazine, 15.10.2009 by staff reporters Fan Junli and Shen Hu
Filed under: China, Exchanges, News, China Mobile, China 中国, CITIC, Compliance, cross-listing, CSRC China Securities Regulatory Commision, Exchanges, HSBC, IPO, Listing, NYSE Euronext, Regulation, SSE Shanghai Stock Exchange, TSE Tokyo Stock Exchange