The Shanghai Stock Exchange
Re-enter the dragon
Aug 14th 2008 | HONG KONG
From The Economist print edition
After almost 70 years, Shanghai’s stock exchange is reopening to the world
FROM the 1860s until the Japanese invasion of China in 1941, Shanghai’s bustling stockmarket listed not only domestic companies but also foreign firms, such as those now known as HSBC and Standard Chartered Bank, which operated out of the international concession. When trading resumed in 1992, only domestic firms could list. But many foreign ones have been eager to join them, and after a change in securities laws announced on August 6th, some may now have the chance.
The New York Stock Exchange (NYSE) hopes to be the first foreign firm to list in Shanghai, and may have the blessing of the regulators, according to Chinese press reports. But there is competition. HSBC and Standard Chartered are also reportedly angling to return, and other big banks have put out feelers.
Had the opening come in 2007 when the Shanghai market was riding a wave of euphoria for much of the year, the motivation for a listing by any Western company would have been self-evident: money—and lots of it. Conditions, however, have nosedived. Corporate profits may have risen since but share prices are down by half, and there is little appetite left to provide capital to domestic companies.
The first foreign firms to list may be luckier, however, because they offer Chinese investors a rare opportunity to diversify into non-Chinese shares. With lower portfolio risk, local investors would also theoretically be able to pay more for Chinese companies, says William Goetzmann, a professor at Yale University who has published a rare paper on the pre-war ties between China’s financial markets and the rest of the world.
For the newcomers, there would be many potential benefits including, above all, in marketing themselves to the Chinese. For example, just as a listing by the NYSE would confer some status on Shanghai, so would it also encourage Chinese firms to use New York’s main exchange as their market of choice. (The big state-owned ones have largely ignored the Big Board since a listing in 2003 by China Life, an insurance firm, was met by a barrage of American lawsuits, partly because of poor disclosure.) The NYSE’s own members may also find it easier to list in China. As a fringe benefit, it may be able to sell China its trading technology. For other companies, the shares issued in China could be used as a form of currency to provide performance-linked pay to local employees, as well as to buy Chinese companies.
But there are pitfalls. Exchange rules may permit the Chinese authorities to attend the board meetings of listed companies, something that might not bother the NYSE, which does not face competition from Chinese exchanges in its home markets of Europe or America, but would probably horrify a global bank. More importantly, the financial barriers that surround China’s economy, such as its closed capital account, restrictions on currency trading, and prohibition on short-selling, mean that shares in China trade at different prices from those with identical rights listed on other overseas exchanges.
That kind of trading inefficiency looks bad for China and would be an embarrassment for the NYSE, which prides itself on its ability to price shares cleanly. To solve it, the potential entrants are considering how to issue other types of shares known as depository receipts—but that is complicated by China’s trading and capital restrictions. To find a solution, they may have to help China to liberalise its financial markets even further. That would not only benefit the foreigners, but China too—which is probably the main reason it is courting them in the first place.