China Opens Avenues for Foreign Companies

- Updated June 30, 2010

China has taken major strides toward opening up its financial markets, allowing foreign companies to issue stocks and bonds on the mainland, tripling the allotment for foreign investors, and easing restrictions on securities industry joint ventures.

The changes, which followed the third round of economic dialogues between the U.S. and China, have been much awaited by foreign securities firms, who had been pushing for increased access to an extremely volatile Chinese stock market. Still, market observers caution that there is much work yet to do.

“Fully opening the local financial market was something that had to happen after China joined” the World Trade Organization (WTO), said Jun Teng, analyst with Jiangxi-based Golden Sun Securities. “But it will not happen in the short term–and not just because the related regulations and rules haven’t been established yet.”

According to Teng, there are state-owned enterprises that have yet to go public, and China will continue protecting its markets to some degree until that process is complete.

However, allowing foreign companies to issue stocks will give more choices to domestic investors, and will create business for Chinese firms. “Once foreign companies are allowed to issue stocks in China, we would definitely like to take up the opportunity to underwrite” their initial public offerings, said China Euro Securities spokesperson Bin Guo.

China Euro Securities in Shanghai, owned by Hunan-based Xiangcai Securities Co. and Hong Kong-based CLSA Asia-Pacific Markets, a unit of France’s Credit Lyonnais, was the first joint-venture securities firm established in China after the country joined the WTO in 2001. “CLSA’s experience will give us some advantages in conducting IPO business for foreign companies,” said Guo. But “there will still be intense competition in the market, especially from local securities firms.”

The majority of top underwriters in China are local, according to Wenli Yuan, senior analyst in Beijing for Boston-based research firm Celent. Foreign firms probably won’t make a big dent in the market right away, she added.

A Foreign Advantage

“We don’t expect large numbers of foreign companies’ IPOs happening in the near future,” she said. Although, those that do list on the mainland will probably use foreign firms to help them reach the market. “Foreign brokerages have an advantage in underwriting foreign companies’ IPO business,” asserted Yuan.

Currently, foreign firms with Chinese joint ventures are allowed to underwrite yuan-denominated A shares, as well as foreign-currency-denominated B shares, Hong Kong-listed H share stocks, government bonds, and other foreign-currency-denominated securities, she said.

The Shanghai Stock Exchange raised about 660 billion yuan from IPOs and additional share offerings last year, up 286 percent from 2006’s 170 billion yuan; the Shenzhen Stock Exchange raised 117 billion yuan in 2007, up from 62 billion yuan the previous year. The price-earnings ratio for companies listed on the two markets was 59 and 69, respectively, compared to the global average of 20, according to Golden Sun Securities’ Teng.

The higher P/E ratio “is one of the most important reasons why foreign companies want to go public in the Chinese markets,” said Fan Mo, analyst with Shanghai-based Soochow Asset Management Co. “They will be able to obtain a better financing capacity in China than in their own countries or other markets.”

When foreign companies do list in China, added Mo, they are likely to comply with Chinese pricing standards rather than those of their home market.

HSBC Holdings has already indicated interest in listing on the Shanghai Stock Exchange, according to the state-owned China Daily newspaper.

Not only will Chinese regulators resume licensing joint-venture securities initiatives; foreign firms will be allowed to expand their operations to include brokerage, proprietary trading and fund management.

So far, China has given approval to four joint-venture securities companies and 28 joint-venture fund management firms. Forty-five foreign securities companies have representative offices in China, according to the China Securities Regulatory Commission.

On Dec. 9, Chinese regulators raised the ceiling on the qualified foreign institutional investor (QFII) program, increasing the cap from $10 billion to $30 billion–a move that has long been expected.

QFII allocations allow institutions to bring money into China for investment in yuan-denominated stocks, but firms have complained that the limits were set too low. The higher quota “will give the foreign investors more operating capacity and opportunities,” said Teng.

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