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China’s Capital Markets Set for Growth

By Angela Pasceri, Financial Correspondent

HONG KONG (HedgeWorld.com) – The Shanghai and Shenzhen stock markets will once again draw attention, as China’s financial reforms of the past two years are expected to provide the catalyst for a rapid expansion in market capitalization.

The value of China’s stock market is expected to quadruple by 2010, according to a recent Credit Suisse report authored by Vincent Chan, with the dual listing of major Chinese H shares and red chips being the major driver.

If China’s market capitalization-to-GDP ratio reaches 50% by 2010, the report noted that People’s Republic of China capital markets would reach a value of $1.88 trillion, compared with $402 billion at the end of 2005. If China’s more successful offshore- listed companies sought a dual-listing on the A-share market, and share prices were valued at 10 times 2005 earnings, the capitalization of the mainland stock market would rise to $2.6 trillion in 2010.

The regulatory reforms, which were taken up at a pace far quicker than the market predicted, and the recovery of mainland share prices, will give Hong Kong a run for its money in attracting mainland listings. Hong Kong found its niche as the key destination for China listings over a period stretching from 2001 to 2005. That was when China restricted fundraising activities on the mainland as it launched its reform of listed companies. During this time, mainland companies raised $149 billion in Hong Kong versus $48 billion in China.

Along with the China Securities Regulatory Commission’s push in 2005 to push through non-tradable share reform, where listed companies converted non-tradable shares into tradable stock, other regulations were implemented to create market supports. This bodes well for Chinese companies, which are increasingly considering dual listings.

There are 53 Chinese companies with a total market capitalization over $3 billion listed in domestic and overseas markets. The top three companies by market capitalization are PetroChina, China Mobile and Bank of China. Within the broader group, 29 stocks are listed only overseas, and not accessible to domestic Chinese investors under the current capital account control framework in China. “There is a good chance that almost all of these 29 companies would seek a dual listing in the domestic China market within the next five years,” according to the report.

The total market capitalization of these 29 companies, based on current valuations, is $731 billion, which is greater than the current aggregate market cap of the Shanghai and Shenzhen stock exchanges.

What would drive activity on the Chinese stock market even more, said to Aaron Boesky, chief executive of Hong Kong’s Marco Polo Investments Ltd., are the Olympics.

China fulfills commitment to WTO to open securities market

SHANGHAI — China has fulfilled its commitment to the World Trade Organization to open its securities market, China Securities Regulatory Commission chairman Shang Fulin has told the Sino-French Financial Forum in Shanghai.

Since beginning of this year, the government had taken a series of measures to further open its capital market, he said.

In February, the regulations on foreign strategic investment in Chinese-listed companies started to take effect, allowing overseas investors to put long-term investment into listed companies, Shang said.

Regulators had also relaxed QFII (qualified foreign institutional investors) rules to attract more overseas investment to the securities market, he said.

Slashing the QFII threshold, the new regulations made it possible for more overseas foreign institutional investors to qualify as investors in the Chinese A-share (Renminbi-dominated) markets, he said.

The rules, which came into effect on September 1, stipulate the minimum securities assets managed by QFII applicants — such as fund management institutions, insurance companies and other institutions that stress long-term investment — as five billion US dollars for the current fiscal year, half the earlier QFII provisions.

Insurance companies must exist for at least five years to become a QFII, a much shorter period than the 30 years in the previous rules.

QFIIs will be allowed to open three securities investment accounts with each of the country’s two stock exchanges. Under the old rules, they could only hold one account with each stock exchange in cooperation with their trustees and local partners.

By the end of August, seven joint-venture securities companies and 23 joint-venture fund management companies had been established in China.

Foreign investors hold at least 40 percent of equity in nine fund management firms, and overseas securities agencies had been allowed to deal directly in China’s B-share (overseas currency dominated) market, he said.

China Ranks Among In Top Ten For Reforming Business Practices

Jacob Cherian – All Headline News Staff Writer
Beijing, China (AHN) – The Doing Business Report 2007 created by the World Bank and International Finance Corporation (IFC) reveals that China is now one of the ten top business reformers among 175 nations following speedy reforms in the country during the past year.

The report confirms that China has executed reforms to make it easier to set up business registrations and also make deals. It has also made efforts in making credit more accessible as well as protecting investors. The rate of reforms in China is now marked first in East Asia and Pacific region, not to mention a fourth-ranking in the world.

The Corporation Law in the country is now upgraded and the time for business registration has been modified from 48 to 35 days. The minimum confirms starting a business has been altered from 947 percent of per capita income to 213 percent. Furthermore, China has also strengthened deals made within the country and increased security measures for investors.

China now has a consumer credit information system. Banks are able to consult the records of the nations’ 340 million before handing out loans.

Also, the new customs application procedures over the Internet has decreased the time it takes for imports and exports to get through customs by two days.

How to do business in China

It is not surprising at all when many foreign investors complained when they do business in China. Many wondered why their years of experience in the business world could not be applied in China immediately. Doing business is about building mutual trust and benefit amidst establishing relationship with people. If you do not understand your counterpart well, it will be quite difficult to establish good cooperation with him/her. An old Chinese saying goes: know yourself and your enemy well and you can fight a hundred battles without any fear of defeat. This greatly emphasized the importance of knowing and understanding your counterpart.

Modern economic model differ greatly from the traditional one, whereby people in the past ‘fight’ till the last man standing. Today, people seek to achieve a “win-win” situation, and pursue long-term trade cooperation under a fair and healthy competition environment. Understanding factors such as China’s history, humanity and culture will be the key to investors’ success in China. As Western thinking and China’s traditional values do differ, encountering the culture differences is therefore inevitable, thus a better understanding of the cultural differences is necessary when doing business in China:

1. Learn how to handle Guanxi (relationship)

In China, Guanxi (relationship) is a complicated field. Establishing relationship with others does not mainly deal with achieving own self-interests or personal goals. A special feature of doing business in China will be that Guanxi (relationship) in China will have to include relationship with the government body, investors, partners and even relationship with your own staff. China government plays a large role in administrating the investment in China. This is because China is a socialist state; the economy is still largely controlled and managed by the government, so when doing business in China, it is important for foreign investors to learn to coordinate with the China government. At the same time, seeking a suitable local partner may be a shortcut and helping hand in developing your business in China market.

2. How to prevail over competition

China, at the moment, can be said to be a big, open market, and the ability to prevail over competition is a very important issue today. Investors should fully realize and maximize one’s advantages. Some investors are afraid that the China’s imitation products will hurt the sale of their products. Even though this symptom is worrying, however in a free and competitive market, it will always be one that has the superior quality that will not be afraid of competition and will prevail eventually. China market is constantly undergoing standardization, and the China government has vowed to protect the quality of the market.

The Vice-Minister of the Ministry of Foreign Trade and Economic Cooperation had previously stated in his speech that being a member of the World Trade Organization, China government will continuously rectify and standardize the economic structure of the market, and will persistently crack down illegal acts of producing counterfeit products. Technology level in China is still relatively lagging behind, thus foreign investors should fully make use of their advantages in technology and expertise to produce high-quality products and services. One should not be over worried about the negative impact brought about by new counterfeited products. Continuous development of one’s technology and emphasizing on innovation will be the key to success.

3. Route for Investment

There are three options to take when make investments in China, mainly: wholly foreign-owned enterprise, Chinese-foreign cooperative enterprise and Sino-foreign joint venture. Which option to take will have to depend on factors such as the investors’ investment direction, investment environment, and the amount of investment to be undertaken. Generally speaking, wholly foreign-owned enterprise require examination and approval from many government bodies and this process can be quite hassle and time-consuming. Government procedures for establishing Chinese-foreign joint venture and contractual joint ventures will be even more and the process will require even more from more government bodies. Thus Sino-foreign joint venture appears to be the ideal investment option as less governmental procedures and authorization time will be required. Possibility of encountering hiccups will be smaller.

China is Nasdaq’s fastest source of growth in new listings, executive says

SHANGHAI, China Chinese companies are the Nasdaq’s biggest source of new listings and don’t appear to be discouraged by stricter legal requirements, the U.S. exchange’s international president said Wednesday.

Mainland Chinese companies now account for 29 of about 3,300 companies listed on Nasdaq, said the president of Nasdaq International, Charlotte Crosswell, in an interview in Shanghai.

The exchange also lists around 50 firms from Hong Kong, a Chinese special autonomous region, putting China third behind first-place Israel and second-place Canada in having the most non-U.S. listings on the Nasdaq, Crosswell said.

“Obviously the growth is coming from China, and that’s where we’re really seeing the pipeline expand, in terms of numbers of companies coming to market,” said Crosswell, who was in China’s commercial hub to encourage the parade of new Chinese firms marching toward listings on America’s largest electronic stock market.

The growth comes despite the potential disadvantage American exchanges face from the relatively strict rules on reporting and corporate governance required by the U.S. government.

Nasdaq President and CEO Robert Greifeld earlier this month said efforts to attract international listings have been hampered by the Sarbanes-Oxley Act, which took effect in 2002 in response to several U.S. corporate scandals.

However, Crosswell said Chinese companies tell her the regulatory hassles are offset by the added trust from investors. Chinese firms also have comparatively little difficulty implementing the requirements because they are often too young to have developed rigid corporate structures, she said.

“They believe it’s a good thing to have,” Crosswell said. “They’re actually very happy they can prove they can comply with it because they think that’s a good story for investors.”

As part of its expanded presence in China, Crosswell said Nasdaq was now advising firms that were still two to three years away from listing. It formerly worked mainly with companies that were much closer — usually six months to a year — from listing on the exchange.

While Nasdaq listings from China have traditionally come from the high-tech sector, they are now hailing from increasingly diverse industries, including services, manufacturing, health care and media, she said.

Business has also been boosted by agreements with the governments of Zhejiang and Jiangsu, two of China’s most economically dynamic provinces, to steer local companies toward Nasdaq listings.

Crosswell declined to give a figure on numbers of upcoming new listings or any other specific business plans in China, but she said growth was accelerating.

“It’s really starting to pickup,” she said. “It’s certainly our fastest growing market.”

Crosswell said the Nasdaq doesn’t seek to compete with local stock markets and prefers to encourage firms to launch dual listings at home and in the United States.

Internationally the exchange continues to view the New York Stock Exchange as its chief rival, she said.

Along with competing to draw foreign listings, the Nasdaq and NYSE have become rivals in expanding overseas in a first wave of consolidation in global stock markets.

Nasdaq amassed a 25 percent ownership stake in the London Stock Exchange, Europe’s biggest market, after the LSE rejected Nasdaq’s initial US$4.2 billion takeover offer in March.

SHANGHAI, China Chinese companies are the Nasdaq’s biggest source of new listings and don’t appear to be discouraged by stricter legal requirements, the U.S. exchange’s international president said Wednesday.

Mainland Chinese companies now account for 29 of about 3,300 companies listed on Nasdaq, said the president of Nasdaq International, Charlotte Crosswell, in an interview in Shanghai.

The exchange also lists around 50 firms from Hong Kong, a Chinese special autonomous region, putting China third behind first-place Israel and second-place Canada in having the most non-U.S. listings on the Nasdaq, Crosswell said.

“Obviously the growth is coming from China, and that’s where we’re really seeing the pipeline expand, in terms of numbers of companies coming to market,” said Crosswell, who was in China’s commercial hub to encourage the parade of new Chinese firms marching toward listings on America’s largest electronic stock market.

The growth comes despite the potential disadvantage American exchanges face from the relatively strict rules on reporting and corporate governance required by the U.S. government.

Nasdaq President and CEO Robert Greifeld earlier this month said efforts to attract international listings have been hampered by the Sarbanes-Oxley Act, which took effect in 2002 in response to several U.S. corporate scandals.

However, Crosswell said Chinese companies tell her the regulatory hassles are offset by the added trust from investors. Chinese firms also have comparatively little difficulty implementing the requirements because they are often too young to have developed rigid corporate structures, she said.

“They believe it’s a good thing to have,” Crosswell said. “They’re actually very happy they can prove they can comply with it because they think that’s a good story for investors.”

As part of its expanded presence in China, Crosswell said Nasdaq was now advising firms that were still two to three years away from listing. It formerly worked mainly with companies that were much closer — usually six months to a year — from listing on the exchange.

While Nasdaq listings from China have traditionally come from the high-tech sector, they are now hailing from increasingly diverse industries, including services, manufacturing, health care and media, she said.

Business has also been boosted by agreements with the governments of Zhejiang and Jiangsu, two of China’s most economically dynamic provinces, to steer local companies toward Nasdaq listings.

Crosswell declined to give a figure on numbers of upcoming new listings or any other specific business plans in China, but she said growth was accelerating.

“It’s really starting to pickup,” she said. “It’s certainly our fastest growing market.”

Crosswell said the Nasdaq doesn’t seek to compete with local stock markets and prefers to encourage firms to launch dual listings at home and in the United States.

Internationally the exchange continues to view the New York Stock Exchange as its chief rival, she said.

Along with competing to draw foreign listings, the Nasdaq and NYSE have become rivals in expanding overseas in a first wave of consolidation in global stock markets.

Nasdaq amassed a 25 percent ownership stake in the London Stock Exchange, Europe’s biggest market, after the LSE rejected Nasdaq’s initial US$4.2 billion takeover offer in March.

SHANGHAI, China Chinese companies are the Nasdaq’s biggest source of new listings and don’t appear to be discouraged by stricter legal requirements, the U.S. exchange’s international president said Wednesday.

Mainland Chinese companies now account for 29 of about 3,300 companies listed on Nasdaq, said the president of Nasdaq International, Charlotte Crosswell, in an interview in Shanghai.

The exchange also lists around 50 firms from Hong Kong, a Chinese special autonomous region, putting China third behind first-place Israel and second-place Canada in having the most non-U.S. listings on the Nasdaq, Crosswell said.

“Obviously the growth is coming from China, and that’s where we’re really seeing the pipeline expand, in terms of numbers of companies coming to market,” said Crosswell, who was in China’s commercial hub to encourage the parade of new Chinese firms marching toward listings on America’s largest electronic stock market.

The growth comes despite the potential disadvantage American exchanges face from the relatively strict rules on reporting and corporate governance required by the U.S. government.

Nasdaq President and CEO Robert Greifeld earlier this month said efforts to attract international listings have been hampered by the Sarbanes-Oxley Act, which took effect in 2002 in response to several U.S. corporate scandals.

However, Crosswell said Chinese companies tell her the regulatory hassles are offset by the added trust from investors. Chinese firms also have comparatively little difficulty implementing the requirements because they are often too young to have developed rigid corporate structures, she said.

“They believe it’s a good thing to have,” Crosswell said. “They’re actually very happy they can prove they can comply with it because they think that’s a good story for investors.”

As part of its expanded presence in China, Crosswell said Nasdaq was now advising firms that were still two to three years away from listing. It formerly worked mainly with companies that were much closer — usually six months to a year — from listing on the exchange.

While Nasdaq listings from China have traditionally come from the high-tech sector, they are now hailing from increasingly diverse industries, including services, manufacturing, health care and media, she said.

Business has also been boosted by agreements with the governments of Zhejiang and Jiangsu, two of China’s most economically dynamic provinces, to steer local companies toward Nasdaq listings.

Crosswell declined to give a figure on numbers of upcoming new listings or any other specific business plans in China, but she said growth was accelerating.

“It’s really starting to pickup,” she said. “It’s certainly our fastest growing market.”

Crosswell said the Nasdaq doesn’t seek to compete with local stock markets and prefers to encourage firms to launch dual listings at home and in the United States.

Internationally the exchange continues to view the New York Stock Exchange as its chief rival, she said.

Along with competing to draw foreign listings, the Nasdaq and NYSE have become rivals in expanding overseas in a first wave of consolidation in global stock markets.

Nasdaq amassed a 25 percent ownership stake in the London Stock Exchange, Europe’s biggest market, after the LSE rejected Nasdaq’s initial US$4.2 billion takeover offer in March.

Case study: Smiths Group – doing business in China

Clint Witchalls, Computing Business 21 Sep 2006

John Lytle the chief technology officer (CTO) of Smiths Group, a global engineering company, needed to expand his networking capabilities into China after the company entered the region.

China represents an increasingly important area of business both as a manufacturing location and a sales hub, according to Lytle.

‘We have made a strategic decision to go into China, driven by the size of the opportunity in that market as it emerges as a global consumer,’ says Lytle. ‘China represents a huge opportunity for most multinational corporations. We just can’t ignore it.’

As China opened its markets, Smiths moved in to explore where China stood from a business and consumer standpoint. ‘Historically, we’ve had a few small operations there,’ says Lytle. ‘Mostly they were joint ventures, low-cost manufacturing centres, but we are now opening our Asia-Pacific corporate headquarters in Shanghai. The purpose of that office is to grow our presence there as a producer, as a consumer, as a supplier.’

But doing business in China is not always plain sailing. The Chinese have a concept called guanxi (pronounced gwon-shee), which roughly translates as ‘relationships.’ To get things done in China, personal connections matter a great deal, but developing them takes time. In China, they cannot be hurried.

‘From a networking standpoint, you have to work with someone who has done it before,’ says Lytle. ‘You cannot assume that you can walk in there and get things done as quickly as you can in other markets. You need to work with people who know how to get things done in China.’ These people are often referred to as old China hands.

Patience is a key virtue if you want to succeed. Not only because of guanxi, but also because the country is still suffering growing pains. ‘There are some place we can’t go, not because the Chinese government won’t let us, but because the infrastructure cannot support the levels of rapid expansion,’ says Lytle. ‘So we have to move somewhat slowly as the government builds their infrastructure.’

Another challenge Lytle faced was IT security – one of China’s key weaknesses. ‘We do a lot of defence aerospace work with a number of different governments, so we have concerns around security of intellectual property,’ says Lytle. ‘Security concerns are being pressed on us by our other government customers, so we have to isolate our Chinese business from the rest of the organisation.

‘We have to set up a firewall between China and the rest of our organisation, just to assure other governments that Chinese nationals will not have open play into our virtual private network. So far, it’s been successful, but we are constantly monitoring traffic to know what is going on and to ensure the firewall is not being breached.’

Lytle’s recipe for working successfully in China is to move very slowly and do a lot of due diligence. ‘It does not hurt to get your feet on the ground and look around,’ says Lytle. ‘You cannot assume that from a couple of conversations or a few written articles, you can understand what goes on there.’