China's stock markets to let in foreign firms

Pudong business district: The home of Shanghai's stock market

Foreign companies will be able to tap into China's gigantic pile of household savings under new rules to allow them to issue shares on the country's two stock exchanges.

They will be able to issue shares denominated in either Chinese yuan or in foreign currency, said Ma Dezhi, a spokesman for China's foreign trade ministry.

Chinese households have $80bn of foreign currency deposited in local bank accounts, according to Andy Xie, chief Asia Pacific economist at Morgan Stanley in Hong Kong.

Household savings in local currency total 7 trillion Chinese yuan, equal to $845bn.

Popular shares

Securities trading has taken off in China, where 50m households now own shares, said Mr Xie.

It could bring good corporate governance into China...the benefit is enormous

Pu Yonghao, Nomura International

In order to join the World Trade Organisation (WTO), China must lift regulations that block foreign companies from enjoying access to its capital markets.

It is therefore drafting new rules that are expected to permit foreign companies to list their Chinese subsidiaries on the Shanghai and Shenzhen stock exchanges.

"I expect the beneficiaries to include multinational companies that have China operations, such as Kodak China," said James Cheng of Asia Strategic Investment Management in Shanghai.

The measure is likely to be "limited to companies with Chinese assets", said Xie.

Unilever has said it is interested in selling shares in China. Other companies who are considering a Chinese listing include Proctor & Gamble, Dutch electronics firm Philips and Taiwan bike-maker Giant.

Household savings

$80bn of foreign currency

$845bn of Chinese yuan

Unilever "would like to sell yuan-denominated shares in Shanghai", said Paul Neely, director of corporate development in Shanghai.

Taiwan's Giant plans to issue US dollar denominated shares in Shanghai to help pay for acquisitions in America, according to sales and marketing president Liu Yong Chang.

Reform plan

China's stock market regulators hope that including foreign companies in the indexes will speed up economic reforms, said Pu Yonghao, an economist at Nomura International in Hong Kong.

"It could bring good corporate governance into China... the benefit is enormous," he said.

I expect the beneficiaries to include multinational companies that have China operations

James Cheng, Asia Strategic Investment Management

The China Securities Regulatory Commission is working to encourage companies to disclose information to the market and to crack down on insider trading by brokerages.

For multinationals, one benefit of listing in China is the high price investors there are willing to pay for shares.

Shares in Shanghai and Shenzhen trade at a much higher price-earnings (P/E) ratio than is generally available in Hong Kong, New York or London.

The price earnings ratio represents what investors are willing to pay for the stock compared with what they can expect to receive in dividends.

China-listed stocks typically trade at P/E ratios of 60 times earnings, whereas in Hong Kong the average P/E is "in the low teens," said Mr Xie.

The draft regulations on foreign listings are likely to take the Ministry of Foreign Trade and Economic Cooperation another six months to complete, said Mr Xie.

The government widened share ownership in April when it lifted bans on Chinese citizens buying US dollar denominated B-shares.