One winning element from the current turmoil in the world’s markets is that some countries stand to gain as investors look to place their money in vehicles that will allow them to weather the global financial storms. The vulnerability of the world’s largest markets is pushing more money faster in the direction of China. There is increasingly nothing to invest in in the United States that has anything like the growth prospects of the Chinese market. So China looks to be one of the safest typhoon shelters out there for the foreseeable future, while it also provides investors with what will remain a solid China growth story in the years ahead, in addition to the advantages of a strong renminbi.
Yet, despite its strength, the non-convertible nature of China’s currency means that, for foreign investors who sink their foreign money into the country, cashing out is not a straightforward process. Structuring a China investment offshore – whether it be a holding company that holds shares of a listed China firm or a parent company that funds its Chinese subsidiaries and takes a cut of the proceeds – means profits are not tied up in renminbi. Going offshore and avoiding company set-up on the mainland also typically means saving much time and money to bureaucracy.
All investors want the prospect of an exit, and the most obvious and popular route is a listing. Where to list? China, while the biggest magnet for money, is not top of the list of exchanges that investors aspire to exit onto. Shanghai’s stock market is easily the worst performing world stock market of the year. It recently dropped below the 2,000-point level, compared with a peak last year of 6,000 after a helicopter ride of a rise in the two years previous. Nobody knows when the market will bottom out or where it will find a new level. That kind of volatility is very scary for investors.
Because of this volatility, the restricted renminbi and many other regulatory and legal uncertainties, investors prefer the security, structural maturity, liquidity and freedom of movement provided by markets in other parts of the world. So the China companies that are aiming at IPOs, or at least the holding companies behind them, are almost all registered somewhere other than China.
Here is the opportunity for the Cayman Islands, the British Virgin Islands and the many other company registration points that provide a degree of accounting flexibility and a listing capability that China for the foreseeable future will not be able to match. These territories are increasingly competing for a share of China pie that will continue to grow even as the rest of the world’s markets shrink, rattle and roll.
So, ironic though it may seem, China companies looking for investment from international sources need to register their mother holding company anywhere but the country in which the company is doing business.
The road to Hong Kong
The choice of an overseas registration country is generally based upon the desires of the investors or target investors, the terms and credibility of different registration territories and the requirements of whatever stock market the company and the investors are looking to list upon.
Hong Kong is, of course, a key market for listing China-related companies for all sorts of reasons, and Hong Kong currently only entertains listing applications from companies based in four places – Hong Kong, the mainland, the Cayman Islands or Bermuda. But there are signs that this restriction will be relaxed, which would provide a big boost to other territories.
The likelihood is that the restrictions on the movement of capital in and out of the country will be relaxed only slowly, which means that a large proportion of the entrepreneurial companies that make up a growing part of China’s business scene will be looking to register companies offshore and list on exchanges elsewhere in the world. This stands to benefit other markets around the world, providing them with an opportunity to play a role in the continuing China growth story.