The IPO of China Inc

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In recent years, the big story in Asia has been the gradual opening of China’s capital markets. The qualified foreign institutional investor (QFII) programme was followed by RQFII (RMB QFII), which was followed by the launch of the Shanghai-Hong Kong Stock Connect.

The Chinese authorities are not only making it easier to invest in Chinese companies, they are also increasing the number of investable securities as part of a project one can call “the IPO of China Inc.”. More Chinese companies are going private. There has been a boom in corporate bond issuance, both in and outside of the country. In addition, investment vehicles such as asset-backed securities are emerging as the authorities push state-owned enterprises to lighten their balance sheets.

TF Cheng1: “It’s not just the number of bridges, represented by QFII and so on. Securitisation will increase the volume of traffic on these bridges. We’re seeing the blossoming of the securities markets. We anticipate the opening up of regulations for investors and the market will start from (the Shanghai free-trade zone). Being there will give us first-mover advantage.”

Nuanced

It remains important to maintain a nuanced view of the economic situation in China. Although the internationalisation of the renminbi is imminent, it will take time. From the approval of its use for trade settlement in 2009 to the recent increase in the number of offshore renminbi centres, the renminbi is becoming more significant. However, it will take time.

Chi Lo2: “Most analysts see this as a policy goal of the Chinese government. I’m not sure. When I talk to people onshore, none of them say this a policy goal. None say there is urgency in it.”

Other items on the agenda of Chinese lawmakers and regulators include keeping growth at a reasonable rate; narrowing the wealth gap; pushing for structural reforms; and tackling the problems presented by rapid urbanisation.

Challenges

One challenge that must be overcome before the Chinese currency becomes truly international is that outbound capital flows must rise to at least roughly balance inbound ones. There may be good reasons for Chinese investors to display a home bias – the economy is outpacing most of the world; Chinese investors can get a better rate of return from local money market funds than in equities from some developed markets; and they keep their investments in their own currency.

Outbound capital flows could be encouraged by allowing state-owned enterprises to invest overseas and through the creation of the Asian Infrastructure Investment Bank.

This text is based on a sponsored article in funds europe (January 2015)
1TF Cheng, managing director and head of Asia Pacific
2Chi Lo, senior economist for Greater China

 

For articles and research by Chi Lo, go to Chi on China
BNP Paribas Investment Partners has been awarded QFII quota totalling (with capital appreciation) around USD 3 billion. It has an RQFII licence, which allows investors to buy Chinese mainland stocks with offshore renminbi.
BNP Paribas Investment Partners also has operations in China, including a 49% share in joint venture HFT Investment Management, which is based in Shanghai. It recently set up a wholly foreign-owned enterprise (WFOE) in the Shanghai Free-Trade Zone.

 

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