China s Stockmarkets Fraser Howie NUS Business School, 6 March 2007
Some questions Recent A-share bull market: How did it come about and is it sustainable? Has the market shed its "casino" label? What role do overseas listings play? Who are the big players? And have foreigner investors made a difference? Surviving the golden decade: can the mistakes of the past be avoided?
Shanghai up, up and away 3200 Shanghai Composite Index: 2001 high to present 3000 China fever is here 2800 2600 2400 You re all interested in this bit! Largest IPO, best performing markets 2200 2000 1800 1600 1400 All looks great 1200 1000 Jun- 01 Sep- 01 Dec- 01 Mar- 02 Jun- 02 Sep- 02 Dec- 02 Mar- 03 Jun- 03 Sep- 03 Dec- 03 Mar- 04 Jun- 04 Sep- 04 Dec- 04 Mar- 05 Jun- 05 Sep- 05 Dec- 05 Mar- 06 Jun- 06 Sep- 06 Dec- 06
Root of the problems Tradable shares A B H 70% Non-tradable shares State State LP Domestic LP 30% Primary & secondary markets Exchange traded Majority shareholder Company control
China s segmented stockmarkets H shares and offshore markets B LP shares A C D A: QFII B: Cross-border M&A C&D: Privatisation A-share markets E State shares E: State share reform
A + state + LP = G- => S- Original share structure: tradable A and non-tradable state The post-reform G-company: 100% A shares Share type Shareholder Share type Shareholder A shares (tradable on exchange) 35% Funds, QFII, retail, etc 45% Funds, QFII, retail, etc State shares (not freely tradable on exchange) A shares Reform (tradable on exchange: state holder Parent group/ subject to 65% SOE/state Parent group/ lock-up) SOE/state 55%
Reform: What does it mean? Improved share structure: A, B and H Share swaps are now possible - M&A First time management has had to interact with shareholders but voting not representative and vote buying common Three-year lock-up: Delays the market impact But management and major shareholders remain unchanged
How do foreigners get invested in China? Foreign capital is welcome Growing number of cross-border deals 1) QFII facility: Nov 2002 <10% holding No lock-up period Post-reform company 45% Shareholder Funds, QFII, retail etc But all require state approval - can delay deals for years 2) Strategic investment: Jan 2006 >10% holding 55% Parent group/ SOE/state Three-year lock-up
Strategic investment in listed companies January 2006: Administrative measures for foreign strategic investment in listed companies Investor must have at least US$100m in capital or US$500m of funds under management Minimum stake required is 10% of total shares outstanding Stake must be held for at least three years After three years stake can be sold in the open A- share market State approval required for any purchase
China QFII Launched November 2002 and revised August 2006: CSRC mindset hasn t changed Preference given to long-term investors High hurdle to entry: 52 approved and quota of US$9.945bn 50 < quota < US$800m Single QFII cannot hold >10% of a listed company. All QFII positions cannot exceed 20% Repatriation >three months depending on investor type Three brokers per QFII
Forget the laowai 22% of A shares ~ 410 BN USD of market capitalization But who owns that Domestic Market Other Breakdown 3% Funds 60 A-Restricted 60% A 22% B 1% H 14% QFII 20 Sec Hse 10 NSSF 5 Insurance Co 5 Retail 60 SOEs 50 Private Funds 50 Manipulators 50 State organs 100 Total 410 Source: WIND & FH estimates
China s Global Stock market China has a global stock market Corporates have gone where there are funds Has led to fragmented markets and inefficiencies Exchange Share Type #Companies Shanghai Shenzhen A-shares 823 437 B-shares 54 4 A-shares 531 145 B-shares 56 7 Market Capitalization BN USD Mainland Sub-Total 593 Hong Kong H+ 31 234.7 H-only listed 195 89 H-only unlisted* 329 Red Chips 91 270.2 Other Chinese companies 27 39.7 Hong Kong Sub-total 1,069 Singapore USA S-shares 3 0 Other Chinese companies Other Chinese companies ~100 11.5 ~70 25.5 Non-Greater China Markets 37 Total ~1,750 1,699 Source: Exchanges & FH estimates, July 2006
Surviving the Golden Decade Share reform successful Economy remains strong Companies are transparent Institutions have strengthened Blue chips have listed Innovation has started Quality has improved Governance has been perfected Investment is rational Value appears The Golden Decade starts
And finally... Privatizing China by Carl Walter and Fraser Howie John Wiley & Sons