One of the most intriguing-and for many CEOs, pulse-quickening-ideas floated this year about the People's Republic of China is the possibility that non-Chinese companies may soon be allowed to list on the Shanghai Stock Exchange. One brokerage report bravely named prospective high-profile candidates: Walmart, Coca-Cola, GE. But these aren't likely to be the first.
In August, London-headquartered HSBC confirmed that it had retained two influential mainland investment firms to explore a possible share offering in Shanghai in the coming months. Beijing is expected to welcome the IPO, estimated to be worth about $4 billion (U.S.), which isn't surprising. HSBC is the fastest-growing foreign bank in the country and the sort of stable institution that the Chinese government would like to see more of. But considering its exceptional history, HSBC may also be an anomaly.
The global banking giant launched in Hong Kong and Shanghai in 1865, and stayed on even after the 1949 Communist victory. With the People's Republic of China marking its 60th anniversary on Oct. 1, listing HSBC on the Shanghai board would send a powerful message internationally about how far China has come. It would also be a significant step toward Beijing's goal of making Shanghai a global financial hub. (China announced in March new guidelines to help the city achieve this status by 2020.)
Where does this leave Walmart and other multinationals that don't have the same long-standing ties to China? At first blush, the future looks bright. The mere discussion of China's equity markets opening up to foreign corporations sounds like an unabashed triumph of capitalism. But what it really highlights are the remaining gargantuan challenges of reconciling the burgeoning capitalist elements of the economy with "socialism with Chinese characteristics," the official term for the country's economic system. Depending on which way the political winds blow, and how volatile the mainland's stock markets behave in coming months (5% index gyrations in a trading day are not unusual), the timeline for foreign companies listing in Shanghai or on the other mainland board in Shenzhen could be five months, five years, or not in this lifetime.
As a concept, the idea is wonderful. From a central planning standpoint, Beijing needs more quality enterprises on its stock exchange to soak up the billions in liquidity sloshing around. For corporations, the China listing proposition is very attractive. In nearly all investment categories, there is currently too much money chasing too few good assets on the mainland. As a result, Shanghai valuations tend to be higher than those at other exchanges. While an index of mainland companies listed in Hong Kong trades at 19 times earnings, the main index of companies listed in Shanghai has a multiple of 37.7.
But in practice, opening up China's bourses to big-name carefully watched foreign companies will require more changes than Beijing may be prepared to make. For starters, share offerings will probably be, like most in China, limited primarily to domestic investors-a restriction that could produce ownership structures unacceptable to many international corporations. Then there's the problem of restricted economic data, which cripples several accepted methods of valuing shares. As for the capital that foreign companies eventually raise, one big question is whether they'll be allowed to take it out of the country. Despite the many robust enterprises and the shiny new skyscrapers rising above its cities, China remains a command economy at heart. Opaque political imperatives and nationalist motives continue to dictate the logic behind the most important financial policies.
The evolution of the Chinese economy remains a complex journey. The country will continue, in the vocabulary of Star Trek, to "boldly go" forth-various plot twists notwithstanding. Citing the prevailing Chinese government's "moral suasion to cool asset prices," the strategists at Japan's Nomura brokerage advocate buying Chinese shares, for now, on the Hong Kong exchange, where liquidity is less influenced by Beijing's current policies and priorities. The Nomura team, which enjoys a reputation for some of the smartest thinking about Chinese investing, prefaced its recent report on China by quoting Star Trek:
Scotty: She's all yours, sir. All systems are automated and ready. A chimpanzee and two trainees could run her.
Kirk: Thank you, Mr. Scott. I'll try not to take that personally.
Like the Starship Enterprise, China is moving forward. But as fans of the sci-fi show know (Scotty's reassurances notwithstanding), a ride that goes "where no man has gone before" is never a smooth one.