London calling

Alderman John Stuttard, the 679th Lord Mayor of the City of London, was in China during October for his last overseas engagement before the end of his year-long term of office. China was a fitting final destination for the Lord Mayor who spent five years in the country during the 1999s as chairman of local operations for PricewaterhouseCoopers (PwC). Back for the second time this year to promote the city of London as a center for business and finance, he talked to CHINA ECONOMIC REVIEW about outbound investment, IPOs and how chartered organizations can raise professional standards.

Q: How important are Chinese stock offerings to the City of London?

A: They are very important. There are 61 Chinese companies on the AIM market [which is structured to facilitate listings by small, high-growth companies], which has been enormously successful. In the last two years, the main market for listings has been Hong Kong with a few companies coming to London, but not that many. We understand from our discussions that there is no bar to Chinese companies listing in London – it is up to the companies themselves to decide where they want to go. Of course, in the short term, with the share prices so high in Shanghai, it makes sense for Chinese companies to raise their capital in Shanghai. If they are really international in their ambitions, they should consider doing H-shares in Hong Kong and GDRs [General Depository Receipts] in London.  

Q: It’s been a while since the US or London saw a large cap Chinese listing. Will they ever return?

A: I am not sure about the US. There is a feeling now that the Sarbanes-Oxley legislation is so onerous in terms of the bureaucracy, costs and the legal liability on the directors that companies will think twice about listing there. But China is a very big place and there are lots of companies emerging. These companies are also becoming more international and seeking to increase their brand recognition. I listed Nokia back in London in 1987, and at the time it was not well-known. The listing certainly helped with the brand recognition that has made the company what it is today.

Q: Apart from the absence of Sarbanes-Oxley, what does London offer that the US does not?

A: If you look at the statistics, last year the London Stock Exchange (LSE) raised US$104 billion whereas New York and NASDAQ together only raised US$69 billion. So it’s not what London can offer that New York can’t, it’s just that London is the bigger market for IPOs. There are over 600 foreign companies listed in London – if you are from China or Kazakhstan or Russia or India you should look at London as part of your strategy when it comes to international listings.

Q: You are opposed to the current ban on the registration of nonprofit organizations and chartered bodies in China. Why does the ban exist?

A: If you look at the history of China opening up and it has been, ‘one small step and, if that works, allow another big step.’ This approach has been extremely successful. When it comes to these unincorporated chartered bodies, they are slightly strange animals. They were set up in the UK, many of them in the 19th century under royal charter, and there is no mechanism in China for dealing with them. But it is in China’s interest to allow these organizations to establish themselves, as the country is very short of skilled people. There are fewer than 30,000 qualified accountants in the whole country. The whole raison d’être of these chartered bodies is to grow the number of professionals in a particular discipline, so it’s hardly a threat. What is required is the right form of regulation to allow this to happen. The training can then be provided either at a university or by a private-sector training provider with the chartered body devising the syllabus and setting the exams.

Q: How do you think China is progressing in terms of wider issues of corporate goverance?

A: What we have to do is work with China – company directors, regulators, the stock exchange, fund managers – to make sure the concepts of corporate governance are fully understood and appreciated. In any country which has been used to a more autocratic form of management, it is a novel concept to introduce checks and balances and have independent directors questioning strategies. But change will happen. I remember at PwC we were putting Chinese students through university and, to begin with, they thought information was power to be used. We had to persuade them that information about clients should be kept confidential. China is beginning to embrace new values which are very different from traditional Chinese values.

Q: Excitement about Chinese outbound investment has been tempered by disquiet in Europe about sovereign wealth funds buying strategic assets. Are these concerns justified?

A: When you have something very large that is capable of doing significant things with little in terms of disclosure of strategy or intention, people become fearful of the unknown. Some of the very large funds don’t publicize their activities, but this isn’t really a problem in the UK as we are very open regarding ownership. This was evidenced last year when NASDAQ tried to buy the LSE and built up a large stake which it has now sold. We in the City and the Treasury discussed the matter and, although from a nationalistic point of view we wanted the LSE to be in British hands, we had to think about what that meant. A lot of the funds that owned shares in the LSE were not British funds anyway, so the LSE was not “in British hands.” What difference would it make if NASDAQ acquired it? The main thing we needed to protect ourselves from was the LSE becoming subject to regulation from Washington so legislation was passed to ensure that. Our view on ownership is that it doesn’t matter who owns what; it is how they run it that is important.
 
Q: What about China Development Bank’s (CDB) investment in Barclays? Given that CDB is a state-run policy bank, this deal was controversial.

A: I was surprised it hadn’t happened earlier. I remember seeing the foreign exchange reserves growing and growing and, to begin with, China just invested it in US Treasury bonds. I thought, ‘If I were an asset manager I wouldn’t do that, I’d want to spread the risk.’ They then started putting it in euro bonds and it is only relatively recently that they have started to invest it in hard assets. I was very surprised that this overseas investment model took so long to emerge, but now it is done and this is a fact of life. Whenever a country’s reserves increase, it is bound to invest in tangible assets like mines, buildings, equities, financial institutions.

Q: So, for example, we can expect to see significant Chinese investment in London property?

A: Absolutely. More than half of London’s financial institutions are owned by foreign companies and almost half of the property in the square mile is owned by foreign financial institutions.