China’s forbidden market lures global blue-chips

June 9, 2011

By Wei Gu
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

HONG KONG — Though multiple stock market listings are going out of fashion, global multinationals seem unusually eager to float on one exchange that’s currently forbidden to them. Last week Coca-Cola joined other big companies, including HSBC and NYSE Euronext, in expressing an interest in a Shanghai listing when it opens to foreign issuers. For now, capital controls make it tricky and branding benefits look limited. But as long as blue-chips feel compelled to curry favor in Beijing, China may see some good business.

At first glance, China’s closed market hardly looks like a must for corporate giants. Capital account controls make it hard to repatriate money. Global institutional investors are only allowed in this retail-dominated market through a $20 billion quota. And as the domestic market has fallen, dual-listed stocks now trade at a slight discount on mainland China compared to Hong Kong. That hurts investor appetite for new companies. The volume of IPOs on mainland China exchanges is down a third from last year.

But a local listing still has its perquisites. Banks such as Standard Chartered and HSBC may want to raise money in local currency for domestic expansion: the 40 foreign banks active in China accounted for just 1.8 percent of total banking assets in 2010. And foreign consumer goods producers like Unilever, Coke and Shiseido could see a Shanghai listing as a way to raise their profile among Chinese shoppers, though Coke is already the sixth most popular consumer brand in the country, according to CLSA.

But adding a local flavor through a listing may also have another big benefit: pleasing regulators. Western companies may be in a better position to demand better market access if their shareholders include Chinese investors. As it is, many non-Chinese companies have seen their market positions erode in China due to unfavorable treatment by the Beijing government, the European Chamber of Commerce in China said in a 2010 report. Brownie points for helping China with its stated goal of turning Shanghai into an international financial center by 2020 can’t hurt.

China has delayed rolling out the international board for a decade, partly to ensure local capital is first reserved for helping finance domestic companies. But as more blue-chips line up at the gate eager to please, Beijing may seize on the opportunity to show its openness to foreigners.

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