THE Shanghai Stock Exchange's (SSE) international board, which will allow foreign companies to list on the mainland, is on the back-burner as China's immediate focus has shifted to reforming the IPO and listing regime for domestic shares. These reforms, however, are expected to bring many benefits.
For a start, the Stock Connect between Hong Kong and Shanghai that opens the way for Chinese residents to buy Hong Kong shares and for Hong Kong investors to buy shares on the Shanghai bourse will be a booster to the languishing A-share market, and there is market talk that this initiative could be extended to London and Singapore in the future.
SSE chief economist Hu Ruyin told BT: "When the domestic listing regime is liberalised and the valuations are right, that will be a good window for the Shanghai international board to be launched, and by then, it can be rolled out fairly quickly."
For now, a conducive market for domestic companies to raise funds is more critical, said Dr Hu in Mandarin on the sidelines of the Future China Forum yesterday, after delegates were told that mom-and-pop investors account for some 99 per cent of total trading accounts in China and 80 per cent of trading volumes.
Several reforms are underway to stimulate the lacklustre A-shares and spur growth of the underdeveloped stock market. The Stock Connect between Shanghai and Hong Kong could be extended to Singapore and London in 2016, projected Cheah Cheng Hye, chairman of Asian-based fund Value Partners Group.
China also lifted a 14-month moratorium on initial public offerings in January; the unprecedented ban had closed a crucial exit door for many private equity firms on their investments and created a huge backlog of companies wanting to tap the market for funds.
Since the IPO market's reopening, 52 IPOs have raised 35 billion yuan (S$7 billion) in Shanghai and Shenzhen, said Frank Lyn, PwC China & Hong Kong markets leader. He added that the Chinese Securities Regulatory Commission (CSRC) has projected another 100 IPOs in the second half of the year (it is not usual for regulators elsewhere to make such market forecasts), reflecting the influence that Chinese regulators still have on the stock market.
The Shanghai and Shenzhen stock exchanges have a combined market capitalisation of 23 trillion yuan but they are not home to the largest and most profitable Chinese Internet giants Baidu, Alibaba and Tencent, which have streamed to the US bourse. "This reflects a major failure of the Chinese securities market in that it is not providing the services that it ought to be providing," Dr Hu said.
The new reforms seek to address these inadequacies by shifting the IPO regime from approval-based to registration-based, with IPO prices set by the market rather than the government. Delisting rules are also being introduced to get loss-making companies and those that have breached regulations to delist.
"The pricing mechanism is distorted," Dr Hu said. "Some large blue- chip companies have low valuations of not even one times of earnings while there is too much speculation in small caps. With the market opening up, there will be greater rationality and more investors undertaking value investing."
This market infancy has also hindered the introduction of listed Reits and business trusts, despite the many years that the regulator spent on preparing a listing framework for these products.
CapitaLand China deputy CEO Lucas Loh said at a panel discussion that if such a platform becomes available in China, this would provide another funding source for developers and local governments, and serve as an exit option for capital recycling. Retail investors would also have another option of investing in real estate, giving the sector greater sustainability.
Dr Hu told BT that with the outlook for Chinese developers clouded by fears of "bubbles" in some companies, rolling out such a listing framework now would be tough. "With more product innovation, investor sophistication also has to go up."