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UPDATED: June 7, 2011 NO. 23 JUNE 9, 2011
Embracing an International Board
A new international stock board will soon be established in Shanghai, allowing foreign companies to list their businesses and tap into the China market
By WANG JUN
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BIG NEWS: Shang Fulin, CSRC Chairman, announces that an international stock board will be launched soon at the Lujiazui Forum held in Shanghai on May 21 (CNSPHOTO)

 Fu Yongchong, investment consultant of Datong Securities Co. Ltd., said under the present background of turbulent hot money from all over the world and growing interest rate in China, the international board may serve as part of the "pool" to enclose the hot money, alleviating the impact of transnational capital upon Chinese stock market, real estate market and the real economy. Hence Fu thinks the launch of the international board is beneficiary to stabilize the overall economy in China.

However, an international board also presents a puzzling situation for industrial insiders who worry that the A-share market, now depressed, is likely to face even more pressure after the launch of the international board.

Fu said such pressure will be directly reflected in liquidity related to the A-share market. Since the A-share market is denominated in the yuan, a yuan-denominated international board will divert some capital from the main board. After making comparison between world top 500 companies, some of which will be listed on the upcoming international board, and the Chinese listed companies in the same industries, investors are quite likely to abandon A-share companies and choose to invest in the international board.

Han Hao, strategic analyst at China Minzu Securities Co. Ltd., said evaluating stocks on the international board presents other problems. In the A-share market, valuation of the listed companies' stocks is higher than in international markets, which means prices of stocks from the same company issued in China are higher than those in international markets.

If the international board adopts the valuation standard in the A-share market, stocks of foreign companies issued in China will be more expensive than those in international markets, which will be difficult for investors to accept.

If valuated by the same standards as the international markets, stock prices on the international board may be much lower than those in the A-share market, which foreign companies are reluctant to see, and this will in turn pull down the valuation level of the A-share market.

Launching an international board, Han said, may further curb the stock price index of the A-share market. This premature panic has already been reflected on the stock price index. On May 23, the first trading day after Shang's words at the Lujiazui Forum, the Shanghai Stock Exchange Composite Index dropped 2.93 percent, the biggest drop on a single day in the past three months.

These fears are unnecessary, said Du Zhengzheng, macroeconomic analyst of Bohai Securities Co. Ltd. When the small and medium-sized enterprise board and the growth enterprise board were launched, market worries of diverging capitals from the main board were rampant, but once launched the two boards didn't have as profound an impact as predicted. Today, major factors curbing the stock price index are the macro economy and inflation expectations, not a prospective international board.

Learn from Japan

Simply launching the international board cannot ensure its success, despite the enthusiasm shown from businesses looking to list and investors looking to commit their financial resources. Chen Lu, Assistant Director of the Research Institute of Haitong Securities Co. Ltd., in an article for China Finance magazine, suggested China develop a roadmap based on the failure of Japan's board in the 1970s on how to create and maintain an international board.

In 1973, Japan adopted a floating exchange rate mechanism putting financial liberalization reform into full gear. That same year, the Japanese Government allowed foreign companies to issue stocks in the country's securities market. Even so, foreign companies listed in Japan were few. In 1980, only 15 foreign companies were listed in the Japanese stock market.

Only after Japan began to deepen financial liberalization in 1985 did the Tokyo stock market see an influx in foreign companies ready to list. By 1991, there had been 129 foreign companies listed, most of them transnational giants from Europe and the United States.

The economic bubble burst later in the 1990s effectively stifled Japanese investors' interest in foreign companies. The feeling from the foreign businesses was mutual as many began to delist from the Tokyo Stock Exchange. At the end of 2003, there were only 23 foreign companies still listed in Japan.

The coup de grace came in 2004, when Tokyo closed the foreign trading board of its stock exchange, transferring stocks from foreign businesses, which used to be traded separately from Japanese stocks, to the first and second boards of the exchange. These boards of Tokyo Stock Exchange traditionally trade stocks of large and medium-sized companies respectively.

According to Chen, excessive listing requirements, strict market supervision and high listing charges led to Japan's failure to maintain an international board. The stagnant economy following Japan's economic bubble burst in the 1990s only solidified the Japanese market as pariah arena for foreign companies.

"China should learn from the failure of the Japanese international board. Only an economic system with stable capital returns can form a virtuous circle of capital flow, and only an effective but low-cost financial supervising mechanism can protect the interests and enthusiasm of the investors. These two points are most important to the success of the international board," Chen said.

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