Designed to allow overseas companies to list shares on China's major stock exchange, Shanghai's highly anticipated international trading board is being heralded as a way to provide a powerful lift to the country's equity markets in the year of the tiger, but it is turning into a paper tiger, experts say.
The planned board, which has been under discussion for years without tangible progress, was brought into the spotlight again last summer after government officials revealed the Chinese authorities' determination to launch it. However, key issues such as share sale limits, the use of funds raised through share sales, accounting standards, and listing requirements remain unresolved.
Companies aiming for the international board first need to comply with Chinese accounting standards. However, it is very unrealistic to require companies with assets all over the world to comply with Chinese book-keeping rules and auditing standards, industry experts say.
Every year, the translation of an audit report based on general international standards into the Chinese accounting format could cost a typical company from $5 million to more than $10 million extra -- an expense that all cost-conscious financial executives would want to avoid, experts say.
Another issue is that the nation's corporate and securities laws currently only apply to domestic companies, and Chinese lawmakers are not ready to restructure the legal framework and make it more adaptable for foreign companies that want to offer A-shares.
The preparation of HSBC's highly anticipated Shanghai share sale is suspended for "at least six months", sources familiar with the deal said last week, citing technical problems in the listing process.
Also, with China running a top-down, command-and-control economy, the current review and approval procedure for the country's equity capital market is an obstacle for foreign companies, strategists argue.
"Listings in China receive too much intervention by the government," said Lou Gang, a China strategist at Morgan Stanley. "Launching an international board would test the current system for launching IPOs (initial public offerings)," he said.
Even so, apart from HSBC, other global players such as Standard Chartered Bank and the New York Stock Exchange have also expressed their enthusiasm for listing on the international trading board.
While overseas issuers are concerned about China's listing regulations, Chinese investors and regulators are worried the outsiders will soak up too much liquidity from the country's equity market.
The cautious sentiment among investors is evident in online forums in China, where the planned international trading board is hotly debated. Some say the foreign companies will take advantage of the Shanghai market's high offering prices and valuations and make use of the stock exchange as an automatic teller machine.
Others warn that HSBC's listing will absorb funds worth as much as 20 Nanpu Bridges in Shanghai -- one of the longest highway bridges in the world, with a construction cost of Rmb820 million ($120 million).
"HSBC will take 20 Nanpu Bridges away from us," one forum participant wrote. "Don't let the irrigation fertilise others' fields," wrote another.
Analysts suggest the authorities should require foreign companies to re-invest the proceeds from their share sales exclusively in China or give approval only to red-chip companies, which are registered overseas but with most of their assets and operations on the Chinese mainland.
Generally, regulators and market observers concur that the introduction of foreign company listings is a must and will help improve the country's equity markets and accelerate the process of making the Chinese yuan freely convertible.
"Foreign company listings will set a good example for domestic companies in China," said Wei Sun, Morgan Stanley's China CEO.
Tu Guangshao, Shanghai's vice mayor and a former vice-chairman of the China Securities Regulatory Commission, said at the Asian Financial Forum in Hong Kong last month that the municipal government strives to build the city into an international financial centre and that the creation of the planned board is in progress.
The international trading board was first brought to the table by Unilever Company in 2000 when the US retailer of personal care products expressed its interest in an A-share listing in a bid to strengthen its network and brand-name penetration in China. Discussion about the board has been under way ever since, but a concrete plan has yet to be made.
Commerce minister Chen Deming said at an investment conference in Xiamen last September that China will certainly allow listings by qualified foreign invested companies on the mainland stock exchange.
PricewaterhouseCoopers predicted last month that the board will start trading in the second half of this year. The new board may help the Shanghai Stock Exchange (SSE) to raise up to Rmb300 billion ($44 billion) through IPOs this year, overtaking its Hong Kong counterpart, which is forecast to raise HK$300 billion ($39 billion), the international accounting firm said.
Photo provided by Imaginechina.