BlackRock: Investors are set to gain as China reworks its equity markets
- China plans to introduce a Nasdaq-style start-up board in Shanghai, which is just one of several policies aimed at changing the face of the country's equity markets.
- "It's really opening the door to a very new and promising financing channel over the medium to longer term. And I think people will read that positively," said Helen Zhu, head of Chinese equities at BlackRock. "I think the asset prices will respond accordingly as well."
Investors are set to gain as China is pushing for new ways that private sector money can fund its domestic companies, according to Helen Zhu, head of Chinese equities at BlackRock.
Her analysis comes amid Beijing's plans to introduce a new stock board for start-ups in Shanghai, which is being billed as a pilot program to test more market-oriented measures before rolling them out in China's other stock exchanges. The new science and technology innovation board was announced by President Xi Jinping in November and is expected to be launched by June.
"It's really opening the door to a very new and promising financing channel over the medium to longer term. And I think people will read that positively," Zhu said on CNBC's "Squawk Box" on Friday. "I think the asset prices will respond accordingly as well."
The new high-tech board is meant to ensure that companies that are not yet profitable but are in "high growth areas" start to have access to the equity financing they otherwise could not tap.
The new tech board and the adoption of a registration-based initial public offering system will prevent officials from intervening in the timing of the listings, and allow pre-profit companies to go public. Many large Chinese start-ups have turned to foreign stock exchanges for capital funding due to strict requirements for initial public offerings in mainland China that say companies must be profitable before listing. That's a condition many Chinese technology companies, like other high-growth firms, cannot meet at an early stage in their development.
As a result, Chinese names such as Alibaba and Tencent held offerings in New York and Hong Kong, respectively. Many Chinese start-ups have also chosen to list overseas in order to boost their brand credibility, and raise capital outside of Beijing's control.
According to Refinitiv data, only one-third of the $64.2 billion raised globally last year through IPOs by Chinese companies came from Shanghai or Shenzhen.
The new government initiatives are widely seen as an attempt at persuading such companies to list at home instead of abroad. An effort last year to develop a domestically traded share class called China Depositary Receipts did not take off. As of 2018, China has more than 186 companies that are valued at at least $1 billion — so-called unicorns. They have a combined value of more than $736 billion, according to a report released earlier this year.
Zhu predicted that the reforms to China's equity markets will continue to be cheered by investors.
"We do still see the economy kind of decelerating but we have seen the policies really inflect. That's why markets have been quite buoyant today, kind of pricing in the expectation that the policies are going to have a substantial impact and therefore, really kind of get us back on track in the second half of this year," she said.
"On a structural reform front, I think that's very important, as well, because it really bolsters confidence. It makes people feel more optimistic about investing in fundamental businesses, as well as in public market and traded assets," Zhu added.
The BlackRock expert said there was "a lot of concern" last year in the market that private enterprises were being pressured by a "lack of access to funding" and the practice of stock pledges — when companies pledge some shares as collateral for a loan.
"All of these things (resulted in a) vicious feedback loop of market panic, share prices going down, and therefore inability to get new financing on a debt or equity side," she said. "This year, I think the capital market innovation, the support in terms of liquidity ... it's already starting to have a positive, stabilizing effect on corporates and on broader sentiment."
The Shanghai composite is up more than 20 percent for the year so far.