There has been renewed discussion recently of the Shanghai Stock Exchange's plan to launch an international board, on which foreign-invested companies could go public and raise RMB funds. While Shenzhen's Growth Enterprise Board is still the immediate focus for investor attention, the prospect of an international board in Shanghai is increasingly on the minds of market participants.
Even without any rules and regulations in place, the plan has already attracted interest from many overseas-incorporated companies, many of whom are large red chips such as China Mobile, Lenovo and CNOOC. Leading international financial institutions such as HSBC, Bank of East Asia and Standard Chartered are also keeping their ears close to the ground.
HSBC stated that it would like to be the first foreign bank to list in Shanghai if the authorities allow, and is working toward that goal. A Shanghai listing would consolidate HSBC's brand influence, raise funds for expansion in the mainland market and widen its shareholder based.
Law firms are keenly aware of this interest, as they are the first port of call for those seeking preliminary discussion and study. "We've been contacted by a number of clients to conduct initial studies and gather information about the process," said Zhao Xiaohong, a partner with King & Wood in Shanghai. "Some of them are large multinational companies with considerable business interests in China, and some are red-chip companies. China's stock market has a high level of liquidity and trading volume. The vast pool of institutional and retail investors and high average price-to-earnings ratios are very attractive to many foreign companies," she said.
Raising funds will be only one of many reasons for foreign companies to seek a Shanghai listing. Freshfields' Shanghai partner Antony Dapiran noted that the strategic importance of the mainland market is an important reason for foreign companies to go public here. According to Dapiran, Freshfields have also received queries from a number of foreign companies expressing interest in listing in Shanghai.
Concerns and expectations
Shanghai's commitment to becoming an international financial hub is clear, but its journey has just begun. Besides its obvious attractiveness, industry observers have also brought up their concerns about the prospects for success of the international board. "Shanghai is undoubtedly an important place for companies that wish to raise RMB funds and raise their profiles in China. But as an international financial centre, Shanghai is still a long way behind Hong Kong," said Dapiran. "Transparency and predictability of the legal system is the cornerstone of any international financial centre. Fundamentally, until foreign exchange controls are lifted, there is zero scope for Shanghai to be a real international financial centre."
Dapiran pointed out that the dominance of retail investors is a main problem of the A-share market, which leads to huge volatility in share prices and trading volumes. "What the Shanghai market doesn't have yet is a large, stable and sophisticated base of institutional shareholders, who not only help ensure a stable and orderly share market but also raise the standards of information disclosure and corporate governance of the listed companies," he said. "The launch of the international board may contribute to solving this problem."
The new board will also post some challenges for potential issuers and their lawyers. "It's important - yet very challenging - for foreign companies to understand and adapt to the Chinese legal system, business culture, way of thinking, regulatory process and code of conduct," said AllBright's corporate partner Bao Fangzhou. "On the other hand, domestic lawyers and other service providers will have to be able to work closely with their foreign counterparts, follow international standards and norms, and understand the business and legal system of all the jurisdictions in which the foreign company operates."
Director and partner Lin Zhong of Chen & Co, a firm that has advised on many domestic company listings overseas, said one of the main obstacles lay in the differences between Chinese and foreign legal systems, especially with respect to company and security law. "There are significant differences between PRC and foreign law in these areas, especially with respect to the scope, intent and interpretation of related legislation and the legal practice of firms," he said. "So we think issuers, legal advisors and the relevant authorities will need time to thoroughly understand these differences and develop suitable practices."
Such challenges aside, lawyers believe the launch of an international board is beneficial to the service industries and domestic capital markets in general. "As the international board will attract additional foreign businesses and financial entities to China, particularly Shanghai, we expect our other legal practice areas, such as general corporate practice and M&A and investment, to benefit along with the increased business of our capital markets practice," said Lin.
All discussions and actions will, of course, remain preliminary until the regulators actually issue the detailed rules and timetable regarding the board. But at least though there is hope.
"If the regulations and requirements governing the international board listings meet international standards and harmonise with those of other leading jurisdictions, the board will contribute greatly to Shanghai's goal of becoming an international financial centre and will influence domestically listed companies in many positive ways," said AllBright's Bao.