by Ossie Froggatt-Smith

This Valentines’ Day the Chinese year of the tiger begins. 2009, year of the ox, saw China rise to the top of the IPO market. Chinese companies going to market sold $50.4 billion worth of shares in 183 deals, 45 percent of global IPO volume compared to the US’ $24 billion from 54 companies. There is no bear in Chinese astrology.

I wish to make two points. First, the opening up of Chinese capital markets will continue, but continue slowly. Second, even minimal changes to Chinese stock exchanges’ attitudes will impact upon the recovery of capital markets in the UK.

Last September the Shanghai Stock unveiled an English translation of its website. Commentators across the globe have supposed this to mean that the SSE will allow foreign-incorporated companies to list on the mainland. Enthusiasm has helped to reify rumors. HSBC, Bank of East Asia, NYSE Euronext and NASDAQ all claim intent to be the first foreign-incorporated companies to take a listing. Tapping a vast pool of liquidity and pushing a brand into a rapidly expanding market are high priorities for any company, and a listing on the SSE could enable this kind of exposure.

However, this shift in the focus of Chinese capital markets, if it occurs in 2010, will not fling open the doors to foreign companies as is expected.

These rumors about Shanghai require two caveats. One, listing will not be easy in process or practice. Chinese Depository Receipts might make the former easier but a policy like America’s (with American Depository Receipts, which bypass currency transactions) would require the Renminbi to be a convertible currency. And it isn’t. More obviously, migrant companies will have to contend with established red-chips (Chinese state-linked companies incorporated off the mainland) including, for example, the world’s largest mobile network providers, China Mobile, which is incorporated in Hong Kong.

Two, Shanghai will not develop one-to-one links with the West. It will be the third head of a giant with whom any foreign country must deal. Alongside Shanghai, Beijing will surely remain the brains behind any reform. The capital is home to the China Securities Regulation Commission, the Chinese regulator, as well as the seat of government. The Hong Kong Stock Exchange remains the market of choice for Asian investors and knowledge-intensive industries. These financial centres won’t give over to an upstart, but rather the new Chinese tripartite would work in concert.

While global markets speed up, using algorithmic trading methods and SAP Business Management Software Solutions and Services©, Shanghai’s will be a different kind of market revolution. It will be a slow one. And for that reason it might slip unnoticed past policy-makers in the UK.

The SSE’s opening will increase competition in the East, and across the world. In Hong Kong, Rusal, a Russian aluminum producer, was able to make the stock market despite serious shortcomings detailed by the exchange itself. In the context of China’s rise, this unprecedented warding away of investors from Rusal looks what relationship counsellors call ‘a cry for help’. PriceWaterhouseCoopers predicts that 2010 will see the SSE overtake Hong Kong’s exchange in terms of capital raisings from new stocks.

In London, at the London Stock Exchange, changes and their impacts have barely featured in debates over the future of market regulation, despite the nervous flutter of press attention after Rusal decided against Belgravia. Weaknesses are particularly clear in the case of London’s Alternative Investment Market. More than one company delisted from the junior market per day in 2009. AIM has struggled to secure its status as either a regulation-light market, or a safe venue for investment with liquidity and capital enough for expanding companies.

The anticipated reforms in Shanghai may not be confirmed, but they are only one aspect of a major turn to the east that will affect most corporate futures. The proposed link between Shanghai and London is not as revolutionary as that characterized by a butterfly flapping its wings in [China], but financial centres across the globe will do well to begin a dialogue on and in Shanghai.

Ossie Froggatt-Smith

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