Asia’s great story of the past decade, and probably of more than one decade in the future, is Greater China: the building of the web linking Chinese businesses and markets between the Mainland and the diaspora, making it into the region’s – someday the world’s – pre-eminent economic engine. This is the story that saved global investment banks during the Asian crisis and this is the story that will deliver most of their Asia profits in the future.
The key to this is, of course, Mainland China’s growth and transition to a market economy, evidenced by the enormous sums of foreign direct investment (FDI) that continue to pour in. Yet most business done by investment banks so far has been focused on Hong Kong and Taiwan (and Singapore, if you wish to include it). That will change, and soon.
The top banks are now talking about A-share business. Their executives are looking to the medium term – say five years or so – and see multinational companies listing their own A shares in Shanghai, primarily as a means of monetizing their investments in China.
The fact that bankers are speaking in such hopeful terms about such a short period of time is truly remarkable given the current status of the A-share market, which sometimes seems to resemble a rowdy casino. Given that there are no standards of corporate governance or transparency, a huge volume of regulations would have to be scrapped and re-written, while an even bigger hurdle lies in the fact that the renminbi capital account would need to be made convertible.
It is a comment not just on the industry’s optimism about China, but on the recent track record of Beijing’s Mandarins to adopt reforms in a systematic and practical way, as opposed to a willy-nilly opening of the doors Russia-style, which only resulted in the country being looted by a few dozen Mafiosi who moved to the French Riviera.
The A-share market as it stands today is not ready for exposure to the cold light of Western capital. It is marked by investment bubbles. These are caused in part by government manipulation, in part by the lack of other vehicles for savings, and in part by simple manic speculation. The concepts of long-term investment, accountability and transparency, often so weak even in Hong Kong, do not exist in China at all.
But the authorities will bring some order to A shares. Bankers say that getting a high-profile foreign investor to list in China would help. But it would have to be someone with an excellent brand name and a long history in China, which only a handful of multinationals such as Nestle, Unilever or Coca-Cola have. This would set a standard for the rest of the market and would be an amazing catalyst to promoting corporate governance in China.
Letting in foreign companies would, over the long run, also provide more places for Chinese savings to invest, which would not only help investors diversify, but also curb volatility in these markets due to lack of supply.
And last, it would reverse the curious situation of Chinese privatization, which to date has allowed foreign investors a piece of crown jewels such as Petrochina, Unicom and China Mobile, but excluded local investors. In other countries it is usually the reverse. Opening up the A-share market will give Chinese corporates a chance to obtain foreign and local capital simultaneously, which is certainly desired by Chinese authorities.
Bankers believe the issue of currency convertibility is not necessarily grave. Thus the recent talk about China adopted a Taiwan-like strategy of qualified foreign institutional investor quotas. Investment banks and regulators such as the People’s Bank of China, the China Securities Regulatory Commission and the State Administration of Foreign Exchange are talking regularly about how to do this.
In the meantime, investment banks are also looking for partners. The precedent was set by China International Capital Corp, a joint venture between Morgan Stanley Dean Witter and several Chinese partners, including the Bank of Construction. Other banks have held back, partly because the market remains too small for more than one CICC and Morgan Stanley ate their lunch.
But others have also held back because the CICC gambit was risky and because its strengths remain based on its partners’ contacts and knowledge of China to the exclusion of others. The next CICC may not be with Chinese banks but securities companies, which have a different set of relationships than CICC’s masters.
