Multinational dream stalls on risk, lack of transparency
with Shirley Yam
Sending junk and winning applause from the receiver is an art. Vice-Premier Wu Yi has done it well.
A good example is the promise made by China in its recently concluded strategic talks with the United States to allow foreign companies and banks to raise funds in its closed equity and bond markets.
Well, since the mainland bond market has been opened to foreign issuers for at least five years without much progress, let's focus on the equity market here.
Mainland officials have every reason to bring international names on to their stock market. That's the quickest way of upgrading the quality of stocks and expanding the size of the market.
Yet, perhaps the most important gain is its reputation. The listing of international corporations can be trumpeted as a proof of mainland's regulatory standards and market maturity.
Similar to the claim by mainland firms to be international companies upon their New York listing, Shanghai can also comfortably call itself an international financial market with the presence of big global names.
No wonder the Shanghai Stock Exchange has been targeting multinational corporations, such as HSBC and Procter & Gamble, in its recent worldwide marketing.
With a price-earnings ratio as high as 50 times and a huge pool of savings waiting to be tapped, mainlanders will have expected an easy sale.
In public, potential issuers have indeed responded positively. Yet it's a different scene in private.
'The interest is zero,' said a US investment banker.
Sure, a mainland listing will turn a foreign brand into household name. It will also mean a good source of yuan funding and a significant reduction in currency risk for companies investing on the mainland. But the costs will be high. Regulatory risks top the list.
Under the current mainland rules, any deal will need regulatory approval, not in principle but in great detail.
Imagine a Brazilian steelmaker having to get the mainland securities watchdog's green light to buy an iron ore mine in Australia once it is listed on the mainland bourse. Imagine Hutchison having to get mainlanders' approvals on the time, size and pricing of its share placement and to get it actually done three months afterwards.
To be fair, regulators do have a strong say in many jurisdictions. But in the case of the mainland, the processes and rules of the game are not transparent.
Of course, these issues can be addressed by granting exemptions to all foreign issuers as the US has done in implementing the stringent Sarbanes-Oxley requirements.
Yet the intangible risk remains. Mainland regulators have yet to build the integrity and reputation of an independent watchdog.
When a regulator can tell listed firms to delay their announcements of a potential tax rise on the ground of fanning negative market sentiment; when a regulator can tell a fund manager how much he or she can invest a day in order to cool down the market, the concern is real.
'I can easily imagine a trading suspension in China if the regulator is not happy,' said the financial controller of a local blue chip. 'The damage to reputation, both on the mainland and overseas, will be huge.'
Market risk comes next. Valuation is undoubtedly higher on the A-share market but so are the volatility and risk.
'No respectable management will feel comfortable with a market where its share will be trading 100 per cent higher than anywhere else,' said a senior investment banker. The price difference will create unnecessary hurdles in future mergers and acquisitions.
'A PE ratio of 50 sounds good. But imagine it going down to 25; your brand will be remembered as a value destroyer,' said a senior official of a blue-chip bank in town.
(Some of you may then ask why Hong Kong-listed red chips are talking about a Shanghai listing next year. Well, it's hard to say no when your dad asks you to come home and you are tightly controlled by him anyway. But it's a different story for the boy next door.)
Given all these concerns, it is hard to imagine any international big name appearing on the mainland bourse in the near future.
Instead of the flagship, the mainland bourse will get their local subsidiaries at most. The question is whether it is what Beijing wants or whether it is ready to give concessions in return for these.
To pretend what you are not has never been an easy thing. Mainland authorities perhaps should appreciate this in their attempt to bring an international element into a closed system.