China’s start-up market can win against the odds

By Wei Gu
September 23, 2009

It is hard to be very optimistic about China’s proposed stock market for start-up companies. After all, similar attempts in other countries have a decidedly mixed track record. Why would China, where small private companies face an uphill battle against state-owned firms, be any exception?
Nevertheless, there are reasons to believe that the start-up market, set to debut in October, offers better potential than previous efforts in Singapore, Germany and Hong Kong.
The country has a big reservoir of fast-growing small companies with real profits. In the past, they have opted for listing on foreign exchanges such as the Nasdaq. Though they were attracted by the prestige of a foreign listing, they also faced a home market that favours size over quality.
Indeed, China, home of internet stars such as Baidu and Sina, is the second-largest foreign supplier of companies to the Nasdaq.
But the exodus has almost ground to a halt. Beijing has tightened its grip on foreign listings because it wants to keep the best growth companies at home. Only companies which already have overseas structures can list their shares abroad, but even then they have to jump through a lot of regulatory hoops.
Obtaining a domestic listing will become much easier, as Beijing has ambitious plans to float hundreds of companies on the new market each year. Maintenance fees are lower and disclosure requirements are less stringent when listing at home.
And companies will not necessarily need to compromise on valuations, since Chinese equities routinely trade at a premium to their foreign counterparts because there is a lot of liquidity chasing a limited pool of stocks.
Although institutional participation is likely to be limited because the small size of most start-up companies, the new market is expected to draw in a large amount of retail investors who favour more volatile small-caps.
No wonder that about 150 companies have already lined up to list on the new market. With a potential universe of 50,000 private companies nationwide, there will be no shortage of new supply in the next few years.
Chinese stock market regulators are wary of the lack of success by Western countries in creating markets capable of funding early-stage companies. Easdaq, Europe’s answer to the Nasdaq, rumbled along for years before finally disappearing. Germany’s Neuer Markt, launched during the dot-com boom, soared and then collapsed along with the rest of the stock market bubble.
In an effort to make a good start, the regulator has picked companies with the best track record of sales and profit growth for the first batch of listings. Most of them already qualify to list on the market for small-and medium-size companies, which is also part of the Shenzhen Stock Exchange.
The first 13 companies to go public almost look a bit too old-fashioned, with leading positions in markets such as railway transport electricity systems, lithium batteries, and medical devices. However, being boring is actually better than being too adventurous at this stage.
China has set the standards for listing on the new market much higher than Hong Kong’s growth enterprise market to avoid overly speculative companies. Like the Nasdaq, China requires companies to have a three-year operating record and a history of profitability.
Yet while it is good to set the bar high, it is even more important to keep it there by de-listing companies promptly if they fail to comply with listing rules.
One of the major reasons that the mainland market has a lot of moribund companies is because the regulator does not force de-listing. American exchanges de-list hundreds of companies a year.
Beijing has finally given the green light to the market for start-up companies after 10 years in preparation because it understands that small private companies, the most vibrant sector of the economy, will be the drivers of China’s next stage of growth. It also does not want to wait until the market gets too hot as then will be more speculative behaviour.
Most of these markets suffer because they cannot attract a sufficient number of long-term institutional investors, so they end up as either illiquid or relying on much more speculative retail investors. This will be an even bigger problem in the retail-driven Chinese market.
Although the start-up market is necessary to provide some much-needed funding for small enterprises, Beijing should avoid getting too ambitious. There were initial talks about bringing as many as 500 companies public a year. But at that speed, disclosure and approval standards will inevitably be compromised.
The low success rate of markets for start-up companies has underscored the importance of not getting carried away. Early investors will walk away at the first sign of disappointment, and the markets are rarely granted a second chance. China should concentrate on getting off to a good start and build it up its new market slowly.

Rethinking carbon diplomacy

September 22, 2009

Climate change was initially billed in a leading role at the G20 meeting in Pittsburgh. Now it looks set to make the briefest of cameo appearances.

A chance for real change at the G20

September 21, 2009

For years, policy makers were able to cut and paste statements on global imbalances from one communique to the next. The words were never backed by action. This G20 meeting could very well be different.

Is Goldman’s Chinese convertible really a taxi?

September 21, 2009

BRITAIN/The number of London’s trademark black taxis booked and waiting outside the European headquarters of Goldman Sachs — meters running — was once used by some as a barometer of the health of London’s investment banking business.

Boy, they’re bearish at SocGen: banking, China, you name it…

September 17, 2009

They’re a cheerful lot at Societe Generale. Here is uber-bear Albert Edwards pointing out that things are getting worse, not better, in the west’s financial plumbing. As if that’s not ominous enough, Dylan Grice has come up with a chilling analysis of the nasty similarities between China today and Japan a quarter of a century ago.

For Chinese exporters, the grass is greener abroad

By Wei Gu
September 17, 2009

   The U.S.-China tyre dispute threatens to spill into other sectors and further squeeze Chinese exporters’ already razor-thin margins. It might seem mind-boggling to many that Chinese manufacturers are still hanging on to weak overseas markets even though the domestic economy looks much healthier and surely offers more potential.

Obama playing a weak hand with Iran

September 15, 2009

The announcement that the major powers, including the United States, are going to open talks with Iran on Oct. 1 ought to be a source of rejoicing. After all, isn’t this what much of the world has been urging for several years, while the European Union conducted a frustrating, low-key dialogue like the warm-up band at a rock concert?

Identifying bubbles

By Wei Gu
September 15, 2009

One of the biggest debates about China today is whether it is at the stage of asset price inflation or has entered into a bubble. Here are some useful quotes from leading bubbleologists to help you decide:

U.S.-China trade spat more about cars than tyres

By Wei Gu
September 15, 2009

Why are the U.S. and China trading blows about something as mundane as car tyres at a time when the world is trying to avoid slipping back into trade protectionism?
It’s not purely about the $1 billion worth of tyres China sells to the U.S. every year. It has more to do with the $100 billion of automotive vehicles, parts and engines America buys from abroad. China is worried about the direction of U.S policy. Beijing fears that the administration may find ways to thwart China’s future plans to ship vehicles to America.
China may not yet export cars to America, but it already exports a growing number of parts. Cars are in the pipeline. A recent spate of bids from Chinese companies such as Geely for failing U.S. and European auto brands have shown that it has the ambition to be the next Japan or Korea.
Auto sales are the only bright spot in U.S. consumer spending due to the Treasury-financed “cash for clunkers” program. Fears about stimulus dollars leaking abroad are one of the reasons the U.S. trade unions have been aggressively pushing for anti-dumping tariffs.
The worry is that the U.S. has imposed the tariffs under a law designed to protect domestic U.S. producers from being damaged by a sudden surge in imports from China. Determining whether this has occurred is a bureaucratic exercise in which experts determine whether such damage is occurring and propose remedies. But there is a political circuit breaker — the president has discretion in whether to implement remedies.
At least four similar, so-called Section 421 petitions were filed during the presidency of George W. Bush, according to the international trade commentator, Scott Lincicome, but none were approved. In this case, Obama came down on the side of the union. This has raised fears in Beijing that there will be more cases in coming months.
The Chinese side seems to fear that Obama is bending too much to domestic constituencies such as union and producer interests. Washington needs to be careful about this. Since it wants to export its way out of recession, it should not agitate China, which is potentially a major purchaser of U.S. exports.
China does not want the Obama presidency to set a precedent by discriminating against Chinese goods at this time. Moreover, it is concerned that other countries might follow suit and start to target Chinese goods as well. Its reliance on exports is potentially the big weak link among China’s recovery.
That’s why Beijing, which has limited its protest mostly to words in recent years for fear of more retaliation, quickly spun into action this time. China’s counterpunch is equally forceful. It is launching an anti-dumping investigation into imports of U.S. chicken products and vehicles.
The idea is presumably to raise the political cost for Obama of taking his pen out of his pocket every time a Section 421 case, which specifically targets China, is presented for his signature.
During the first half of this year, 89 percent of China’s chicken imports came from America, representing a fifth of all U.S. chicken exports. In comparison, tyres account for just 0.4 percent of the value of goods what China sells to America each year and 0.07 percent of China’s total exports.
While it is no secret that America subsidises its agriculture industry, China also spares no effort in helping exporters and putting up import barriers to protect domestic manufacturers. For example, China agreed in August to stop some discriminatory charges it imposed on imported U.S. auto parts after a World Trade Organization ruling from September 1.
After chicken, U.S. soybeans might be the next target. As much as 40 percent of China’s soybean imports came from America last year. And this year, China’s soybean imports increased by 28 percent.
The last time China took retaliatory measures was during the “garlic trade war” against Japan and South Korea in 2000-2001.
Washington and Beijing have vowed to cooperate in seeking to revive global economic growth, but the dispute over tyres has laid bare the two countries’ continued friction over trade. This could spill into the G20 summit later this month and Obama’s scheduled visit to China in November.
In previous meetings between the top leaders of the two countries, mostly the U.S. lectured and China listened. Now Beijing is more outspoken about expressing its own concerns and many at home are calling for more tit-for-tat policies.
It remains to be seen how the U.S. will react to a more assertive China.

Carrying the dollar lower

September 14, 2009

There’s been lots of hand wringing over the fate of the dollar, with its recent slide giving rise to, in the words of blogger Macroman, the “dollar going down forever” crowd. Data released from the U.S. Treasury on foreign capital flows didn’t help matters. Seems in July foreign investors wanted to put their funds elsewhere.