Greater financial liberalisation in China is the key to unlocking pan-Asian portfolio investment flows, which would enable to the region to finance its own growth rather than rely on Western financial markets.
However, that road is a bumpy one: although the Communist Party’s plenum in November called for reforms to boost the role of market-based decisions, the reopening of the A-share IPO market has been fraught with cancellations and delays imposed by the securities regulator.
Teresa Ko, China chairman at law firm Freshfields Bruckhaus Deringer, told FinanceAsia that she thinks the IPO snags are less about the China Securities Regulatory Commission’s instinct to control and more about ensuring quality companies come to market.
“The CSRC’s registration system is a big change to the IPO vetting process,” she said, during a panel discussion at a conference last week in Hong Kong.
“Its decision-making process is a real change to how underwriters and issuers handle IPOs. Although the government wants to maintain control, the process is more market-orientated... The government wants to see listed businesses that are sustainable, have good standards of governance and are accountable to shareholders,” Ko said.
Gilles Planté, deputy CEO for international and institutional banking at ANZ, said the region’s capital markets have deepened since the global financial crisis. “More claims on Asian assets are now in the hands of strong Asian banks, including ones from Japan, Singapore and Australia,” he said.
Although global liquidity retreated from the region last summer due to concerns about an imminent end US Federal Reserve's asset-purchase programme, it was “orderly”, says Planté. Foreign investment into the region has extended its horizon and is more stable and strategic.
George Hongchoy, CEO of The Link Management, a Hong Kong-based manager of real estate investment trusts, said US-style corporate governance is starting to bear fruit when adopted by Asian companies.
He argued that, until recently, Asian family enterprises and state-owned companies relied on connected transactions and lacked the concept, nurtured over more than a century in the US, that management is professional and charged with fiduciary responsibilities to owners.
However, since the Asian financial crisis of 1997-98, evidence has been building that companies with the best corporate governance tend to rise to the top, Hongchoy said.
Ko said this was partly because Hong Kong has promoted a listing culture of transparency, timely disclosure and responsible controls. Beginning in April of this year, new regulations will require potential issuers to file draught prospectuses online.
In a similar vein, she said the CSRC in mainland China is now taking steps to iron out inconsistent filings, misleading information, and weak lock-up periods for controlling shareholders. New vetting rules allow the CSRC to bar financial sponsors from doing business for up to three years if they are found to have failed in their duty to properly prepare companies for an A-share listing.
Her concern is that the mainland restrictions may be so tough that it encourages mainland companies to list in Hong Kong instead. But at least the new listing rules are for the longer-term benefit of the Chinese stock market, she said.
Regulators in China and Hong Kong are also strengthening their codes of conduct to deter bribery and corruption, and in Hong Kong, to promote greater diversity in the boardroom, she added.
Tad Beczak, chairman of regional reinsurer ACR Capital, said regulators will continue to want to protect their domestic financial industries. That can impose delays on needed reforms, which is a barrier both to better governance and to cross-border integration. But he argued technology will render many of these protections meaningless.
“Technology breaks down barriers and creates new players,” Beczak said, citing Alibaba’s creation of huge pools of capital through its online platform. “Peer-to-peer financing and other internet-based technologies will change everything.”
That is a precursor to the development of the region’s investor buy side, which will seek to invest at a pan-Asian level. “In five to 10 years, we will see new types of Asian investors: pension funds, insurance companies, sovereign wealth funds, and hedge funds like Hillhouse [a Beijing-based fund],” said Beczak.
Planté added that this would not be just because of strong indigenous growth but also due to the fact that Western capital markets had lost their sheen as safe havens during the 2008 financial crisis.
He said Asia’s opportunity to develop a meaningfully integrated financial market is in opening capital flows from old, rich, industrialised countries such as Japan and South Korea to younger, poorer, fast-growing markets in Southeast Asia and India. But that can only happen once corporate governance in recipient countries improves.
Glenn Maguire, chief economist at ANZ, said the big question is when will China open its capital account. Financial market activity in the region has yet to match its economic growth because national savings pools remain stuck behind capital account restrictions.
“In 2000, when China joined the World Trade Organisation, it created a supply-side shock to the real sector,” Maguire said. “When it opens its capital account, it will provide the financial sector with a supply-side shock.” The fallout is likely to impact the current intermediaries of Asian savings: Western banks and asset managers, who manage Asian wealth by recycling it in Western financial assets instead of domestic or regional ones.
But such a change won’t occur even if China liberalises its capital account if domestic assets are not available or if local standards of corporate governance are too poor. “We need to see depth in Asian financial markets so that assets here are ones that Asian institutional investors wish to hold,” Maguire said.
