Shanghai’s International Board

Shanghai Stock Exchange

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Shanghai plans to be an international finance center by 2020, and creating a board on the Shanghai Stock Exchange where foreign companies can list their shares is seen as an essential component. Preparations for the board have been taking place over the past two years, and Shanghai’s Deputy Mayor, Tu Guangshao, who is responsible for finance, said in February that the board could be launched this year. On April 22, the 21st Century Business Herald reported that regulators will allow a first batch of 10 foreign and overseas-listed Chinese companies to list on the board.

In early June, Coca-Cola, the world’s biggest soft drinks manufacturer, joined the discussion when Geoff Walsh, the company’s communications director for the Asia-Pacific region, told the Hong Kong Economic Journal that Coca-Cola is “exploring the opportunity of listing our stock on the Shanghai exchange.”

Coca-Cola has a long history in China. The company set up bottling plants in Shanghai and Tianjin in 1927, but was forced out in 1949 with the founding of the People’s Republic of China. Nonetheless, when China began its economic reform program, Coca-Cola was one of the first international companies to understand the inherent potential of the vast China market and returned to the country in 1979. The company has been rewarded for its foresight. Coca-Cola is currently enjoying double-digit growth in China – its third-biggest market after the United States and Mexico – at a time when sales are close to flat across North America and Europe.

In addition to Coca-Cola, other big names that have expressed an interest in listing on the international board include HSBC, the New York Stock Exchange, Volkswagen, Mercedes Benz, Siemens, Unilever and Standard Chartered.

Talk of an international board has been around for several years, and the early speculation was that it would open in late 2010. The stop/start nature of the discussion makes me wonder whether this is a Central Government-sponsored initiative, or one that is being driven primarily by the city of Shanghai. I can understand why having international companies list on its exchange would be good for Shanghai, but it’s more difficult to understand why it would be in the best interests of the country as a whole.

First, it forces the issue of full convertibility of the Chinese currency. While making the renminbi an international currency is one of Beijing’s long-term objectives, officials have been reluctant to commit to a timetable. Sun Lijian, vice-dean of the school of economics at Fudan University, focused on the stability of the nation’s financial markets. “Launching the international board has a similar effect as further opening up the capital account, which will expose the country to more international capital flow and greater risk,” he said. “Making the yuan more convertible under the capital account has its benefits but it will also incur more speculative activity and financial instability.”

Secondly, China’s stock markets have been under pressure all year due to inflation fears, credit tightening and the slow recoveries in the US and the country’s other export markets. The SSE Composite Index is down 4 percent this year, and an additional supply of shares will only weaken the market further. Notably, the Shanghai index dropped by approximately 3 percent on May 20, the same day that the China Securities Regulatory Commission Chairman Shang Fulin said that the international board launch is not very far away.

Third, an additional supply of shares will divert capital away from the increasing number of local, private companies that are looking to China’s stock markets for the capital needed to grow their businesses. In any economy, small and medium-sized, non-government owned companies are the ones that create the most employment. The same is true in China.

Rather than allowing international companies to list the shares of their parent companies, I would have thought that a better first step would be to allow international companies to list the shares of their China operations in China. This would not only encourage an even greater commitment to China, but it would also provide Chinese investors with a direct China play, one that they implicitly understand.

China may well be its third-largest market, but Coca-Cola is a $67 billion global brand, only a portion of which is represented by the China market. China is one of Coca-Cola’s fastest growing markets, and Chinese investors will most likely be most interested in investing in this portion of the company’s business.

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