Too big to ignore: the internationalisation of Chinese balance sheets
‘Given the scale of China’s economy and the sheer magnitude of China’s US$9.4 trillion domestic debt market, the coming participation by international investors in this asset class will have a huge impact on global investing’
Under Zhu Rongji, China decided to go international with its equity offerings in the early 2000’s, starting a long-term developmental process of internationalising their balance sheets and opening up to global capital markets.
Importantly, it also began a process of China’s under-managed state-owned enterprises beginning to adopt international discipline. By this I mean pre-IPO restructurings, experiencing underwriting and due diligence proceedings, meeting exchange listing requirements, producing audited financial statements, and engaging institutional investors.
At the same time, this also permitted SOEs to raise large amounts of international capital while Beijing too steps toward opening up the current account. Some of the largest Chinese SOEs became listed companies as a result of this programme. Granted, there are still corporate governance and transparency improvements to be made, but the directional shift is significant and is now gaining momentum.
Tagging on the coattails of this policy trend, many private Chinese companies, including many VC-backed tech firms that would never have been able to list domestically, also went public internationally. This was the genesis of some of the leading Chinese tech companies of today, including Sohu, Sina, NetEase, Alibaba Group, Tencent Holdings, among others.
The result was that Hong Kong became the largest IPO market in the world. Chinese companies became a significant proportion of the Hong Kong stock index, and Chinese IPOs were also a leading line of business for US and other international stock markets. Today, although Chinese international IPOs have quieted, Chinese equities continue to be a very important component of secondary trading in international equity markets. Indeed, the Hang Seng China Enterprises Index -- a free-float capitalisation-weighted index comprised of H-Shares -- has a market cap of HK$2.94 trillion (US$376 billion), comprising 34 per cent of the overall Hang Seng Index.