Mainland Listings

inSight

23 Aug 2001

Mainland Listings

Hong Kong companies are increasingly talking about listing their shares on the Mainland. It will be interesting to see how the Mainland authorities respond.

I have read press reports that some of the companies listed on the Hong Kong Stock Exchange have expressed a keen interest in getting their shares listed on the Mainland, either in the form of A or B shares. Given that the price/earning ratios in the A/B share markets are a few times higher than in Hong Kong, it is obviously a lot cheaper to raise money in the stock market on the Mainland than in the stock market in Hong Kong. It is not clear to me whether these companies have considered how the money raised is to be used. Presumably, this would be for financing their activities on the Mainland, because, under current exchange control rules, the movement of capital, in renminbi or in foreign currencies, raised in this manner, freely out of the Mainland is prohibited. But it should not be difficult to handle the money in a manner most suited to the needs of the companies concerned, given the increasing volume and complexity of their business in and with the Mainland.

It would be interesting to see how the Mainland authorities respond to this keen interest among Hong Kong companies in seeking a listing in the A and B share markets. Under existing regulations, only companies incorporated under the Mainland's Company Law are allowed to list in the A and B share markets. So far, very few foreign-invested joint ventures, or Mainland subsidiaries of Hong Kong companies, have been given permission to list in these markets. From the point of view of further developing the stock market in the Mainland - an important avenue of financial intermediation for channelling savings into investment that promotes economic growth - allowing overseas companies to list in the A and B share markets should be welcome. But for two reasons the Mainland authorities may be concerned about domestic savings being channelled in this manner into foreign companies that invest predominantly outside the Mainland rather than within. First, they may not feel comfortable about such a leakage of domestic savings and its implications for the balance of payments position and for the level of foreign reserves. Secondly, they may also not feel comfortable, at this stage at least, in allowing the domestic financial intermediation process, albeit essential to promoting growth and development, to be internationalised in this way. This is understandable given the risks involved in the liberalisation and the globalisation of what were hitherto predominantly domestic markets, as a few of our Asian neighbours learnt from painful experience during the Asian financial turmoil of 1997-98. Financial intermediation conducted on an international dimension, involving the market being accessible freely to all players on a global basis, may, at times, develop a life of its own and behave in a way that is destructive rather than conducive to growth and development.

So, in my opinion, it is likely that, while seeing the advantage of allowing more listings and thereby increasing the supply of financial instruments for absorbing the very substantial savings of the people, the Mainland authorities may wish to impose certain restrictions to address prudently these concerns. One outcome may be to allow initially Mainland subsidiaries of red chip companies (i.e. Mainland controlled) to be listed in the A and B share markets, with gradual opening up of these markets to the Mainland incorporated joint ventures or Mainland subsidiaries of Hong Kong companies at a later stage. Under current exchange control rules, the money raised (the domestic savings absorbed) would then, one could argue, be more readily ploughed back into the domestic economy in the form of investment. This of course is understandable, for those in a position to decide should rightly be careful about the pace of financial liberalisation. Only when the attendant risks have been clearly identified and a prudent risk management mechanism put in place should the relevant steps, however beneficial, be taken. A healthy balance of payments position and the possession of very substantial foreign reserves are clearly considered to be the bulwark against financial instability in the Mainland. Whatever the theoretical justification or practical consideration, this attitude is unlikely to change, simply because this is also how the international market judges the financial position of the Mainland.

But it must also be recognised that, by and large, rules designed to restrict the free flow or use of money are made to be broken or to be circumvented. And when this concerns, for example, the flow of money between a parent company and a subsidiary with highly integrated business and management structure, operating closely in both jurisdictions and in different legal forms, and assisted by sophisticated financial and information technology, it is possible that rules do not really mean much. Then the authorities would be faced with the situation in which the rules are blatantly flouted. They would consequently be put into a position of either stubbornly forcing the compliance of those impractical rules or condoning it by legitimising flouting. This would mean either backtracking towards financial repression or taking further steps (and further risks) to liberalise. It is definitely not an easy decision, but it has to be faced bravely.

Joseph Yam

23 August 2001

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