China’s two stock exchanges have for many years competed to lure quality listings. The nature of this rivalry may be about to change as the authorities take action to better position the Shanghai and Shenzhen markets.
It is reported that the regulators will set a clear share-capital threshold that will decide which listing candidates go where, a move designed to mimic the relationship between NYSE and NASDAQ.
For non-financial companies issuing more than 80 million shares through an initial public offering, the destination will be Shanghai. Those aiming to sell fewer than 50 million shares will go to Shenzhen, while those in between can choose to list in either market. As for financial companies, 400 million shares is the minimum requirement to list in Shanghai, with any falling short of that mark directed to Shenzhen.
The proposed new arrangement may take effect as early as November. Previously, there were no written rules governing listing destinations, although regulators generally preferred companies issuing more than 100 million shares to list in Shanghai.
The larger bourse will benefit most from the revised threshold. Indeed, the Shanghai exchange lobbied intensely for change, having seen many companies opt for Shenzhen recently due to more attractive valuations.
In the first half of 2010, Shenzhen surpassed its larger counterpart in terms of funds raised for the first time in years. Between January and June, a total of 216 Chinese companies raised about US$34.8 billion from IPOs globally. Shenzhen accounted for US$22.6 billion – higher than any other exchange worldwide – with Shanghai trailing on US$8.2 billion.
Shenzhen’s rapid growth is largely down to small firms wanting to list there. The bourse now has two boards tailored to smaller cap companies, the Small and Medium-sized Enterprise (SME) Board and the ChiNext, a NASDAQ-like market that mainly caters to start-up firms.
Meanwhile Shanghai has struggled as larger companies delay fund-raising activities in response to constantly shrinking valuations and lackluster investor sentiment. With concerns about slowing economic growth in the second half, things may get worse before they get better. As a result, Shanghai has become so desperate to woo new listings. And now Agricultural Bank of China (601288.SH, 1288.HK) is out of the way, there are few large-sized IPOs left for this year.
The revised threshold enables Shanghai to target companies issuing 50-80 million shares in addition to listings by larger enterprises, but Shenzhen shouldn’t be unduly worried.
The bourse’s appeal to smaller firms has now been officially endorsed and, at least in the medium term, the majority of mid-sized firms given a choice between Shanghai and Shenzhen are most likely to head south, purely on the basis of stronger valuations. The average price-to-earnings ratio on the SME is around 40 and on ChiNext it is 60, far higher than Shanghai’s 20.
Shanghai would be best served encouraging more blue chip listings rather than chasing after smaller firms. The development of a blue-chip bourse hinges on how many quality listings it has – and this means allowing in overseas-listed heavyweights with good track records.
There is no shortage in demand: Red chips such as China Mobile (CHL.NYSE, 0941.HK) and China National Offshore Oil Corp (CNOOC; CEO.NYSE, 0883.HK) as well as foreign giants like HSBC (HBC.NYSE, HSBA.LSE, HSB.Euronext, 0005.HK) and Coca-Cola (KO.NYSE) have all expressed an interest in listing in Shanghai.
But a grand fund-raising scheme must be backed by a loose liquidity scenario and strong investor confidence. The regulators need to step in and help the struggling mainland market deliver these conditions.
With margin trading, short selling and index futures coming into full swing, overall liquidity will likely be boosted, but these new, complicated trading mechanisms require tougher regulation and oversight. The government must therefore do more to clamp down on securities crimes – it takes time and effort now but will pay off in the long term, and it is far more effective than just flinging fresh capital into the market.
The key is to reduce stock-price volatility and ensure market quality.
There is nothing wrong with the Shanghai Stock Exchange’s desire for more listings, but it should consider more carefully the kind of listings it wants. If the city is to fulfill its ambition of becoming a global financial hub, then it needs a blue-chip stock market.
It is time to think big.