All Aboard for China's International Exchange

Foreign powerhouses from Unilever to HSBC are preparing for the launch of Shanghai's international board

Shanghai Stock Exchange Building
Christian Kober | Robert Harding World Imagery | Getty Images
Shanghai Stock Exchange Building

Carefully worded official statements, released at key intervals, suggest the time is fast approaching for the Shanghai Stock Exchange's proposed international board for foreign company stock trading.

Wang Jianjun, a deputy director at the China Securities Regulatory Commission (CSRC), described May 17 significant progress over the past year in key areas such as trading rules, board mechanics and regulatory oversight.

Wang's comments previewed a confident statement May 20 by CSRC Chairman Shang Fulin: "We are getting closer and closer to launching the international board." He spoke at the Liujiazui Forum in Shanghai.

The next day at the forum, CSRC Director of International Cooperation Tong Daochi confirmed that yuan, not U.S. dollars, would be used by traders on the board. Share prices for foreign listed companies would be based on their average stock prices on overseas markets, converted into yuan, he said.

Comments from these and other CSRC officials – as well as industry sources – have raised expectations of a board launch soon, perhaps before the year's end and as early as October, after a green light from the State Council.

"Approval is likely in the first half of the year," an investment bank source said in May. "What follows is that companies will report data. The first company may list as soon as October.

"Everyone is preparing materials."

Finance industry executives haven't missed a beat. Cai Hongping, Asia Investment Banking chairman at Deutsche Bank, told Caixin on May 25 that the board is technically ready for traders.

Cai said the exact launch date "now depends on the determination of the State Council leadership."

Foreign concerns such as HSBC bank, consumer products giant Unilever, Coca-Cola and Cheung Kong Holdings have expressed interest in listing on the board. Joint-venture Chinese and foreign securities brokers are likewise getting ready for business.

"HSBC's prospectus for listing on the International Board was completed long ago," said an investment bank executive. "Only financial data has been updated every year."

Laura Cha, an HSBC vice chairwoman and former CSRC vice chairwoman, said May 20 her bank plans to apply as soon as the board is launched. The bank hopes to raise about US$ 5 billion, and is preparing stock with help from China International Capital Corp. and CITIC Securities.

Start-Up Challenges

Enthusiasm for the new trading platform is not universal. Stocks trading on the Shanghai A-share and Shenzhen exchanges have fallen in recent weeks on fears that the international board may channel investors away from established, mainland stocks. Wholly foreign-owned companies would be first to list on the board, followed by Chinese companies.

On May 23, for example, the Shanghai Composite Index declined 2.93 percent – the steepest single-day retreat for the index in three months.

Meanwhile, the board's architects have had to confront the daunting challenge of building a stock pricing structure for a brand-new board that matches Chinese investors with companies from around the world.

Leading economics advisor He Qiang, a finance professor at the Central University of Finance and Economics, has repeatedly recommended pricing the board's stocks in U.S. dollars.

But the opinions of He, who also serves as a committee member for the Chinese People's Political Consultative Conference (CPPCC), and his fellow dollar promoters lost favor during recent legislative sessions of the CPPCC and National People's Congress in Beijing.

Sources close to the board's designers told Caixin that the new consensus is that foreign company shares need not be priced in dollars, given the complex nature of regulatory oversight of the U.S. currency in China.

Red Chips to List First?

Other questions have focused on whether companies listed outside China should first be allowed to join the international board, followed by so-called red chip companies, which are Chinese concerns listed on the Hong Kong exchange.

Investors watch a display at a stock exchange in Huaian, Jiangsu Province, China.
ChinaFotoPress | Getty Images
Investors watch a display at a stock exchange in Huaian, Jiangsu Province, China.

Red chips include a variety of major, profitable and state-owned enterprises such as China Mobile and China National Petroleum Corp. Chinese securities regulators have been interested in bringing red chips back to the mainland A-share market since 2007. The Shanghai bourse last year started promoting the idea that red chips could come home via the international board.

But a Shanghai Stock Exchange survey found that only 38 of the 407 red-chip companies would meet what's expected to be the criteria for listing on the international board.

In the past, Shanghai bourse officials reportedly recommended lowering standards significantly for red chips that wanted to trade on the mainland. But regulators scuttled that proposal.

Cai said it's in the best interests of the board to set a high-entry threshold and sign up foreign companies early on.

A UBS Securities report lists three types of companies that may be eligible for the board: Companies doing business in China such as Procter & Gamble, Coca-Cola, Unilever, Carrefour, Walmart, Siemens, Daimler-Benz, Volkswagen, General Electric and IBM; profitable Hong Kong-listed enterprises such as HSBC and Bank of East Asia; and red chips.

"On an institutional level, requirements for the first batch of companies on the international board will be more stringent, and purely foreign companies will go first," a source said.

Pricing Shares

Pricing stock has been another concern for architects of the international board.

Since liquidity levels on overseas stock markets are much greater than those on Chinese markets, international company valuations are much lower than those among Chinese companies listed on the A share market. This fact underscores the complexity of international board pricing.

"The current suggestion is to list and trade based on a listed company's price on international markets, converted into yuan," said a source. "Actual operations are still being discussed."

International companies may not be willing to price their international board shares below the average price for A-share market stock, said the investment bank source. But Shanghai traders may be turned off by a company whose "price exceeds its own price on international markets," he said.

"The issue price should not be set too high," the investment bank source said. "It will inevitably lead to an A-share valuation adjustment on the A-share market."

A report by Li Cong, an analyst at Huatai United Securities, said the market is concerned that the international board may exert downward pressure on other market indexes and stock prices. Equity finance levels may be adjusted, too, steering more funds into international board stock at the expense of other market shares.

These and other factors – such as A-share market stability, and A-share valuations – are weighing on regulators and other officials as they set an opening date for the international board. They don't want any hiccups during the start-up phase.