By Elliot Wilson
Despite the odd noise to the contrary, China’s domestic securities industry seems unlikely to open much to foreign investors any time soon
Few countries know better than China how to extract maximum financial return from foreign investors with minimum domestic sacrifice. Or how to keep said investors forever on their toes – with enticing suggestions that a key industry is about to be opened up to foreign investment, while the doors stay firmly shut.
Such is the situation with the domestic securities industry. Over the past two years, China’s stock markets have roared: in the year to September 28, the Shanghai Composite Index rose 108%, following on from a 130% gain in 2006. New retail investor accounts in the mainland are opening up at the rate of 250,000 a month, while daily turnover on the Shanghai bourse – which has sucked in some of the world’s biggest stock sales this year – regularly outpaces Hong Kong.
Yet precious little of this has helped either institutional investors looking to benefit from China’s latest bull run, or investment banks still seeking licences to underwrite equity and debt offerings in the world’s fastest-growing major economy. The country remains exactly as closed (or as open) as it was at the start of the year, and looks likely to remain so for some time yet.
Not here, not now
Beijing does make regular vague, rumbling noises about its desire to hand out new, domestic securities licences to foreign institutions.
During the second US-China Strategic Economic Dialogue, held in May, US Treasury secretary Hank Paulson was told by Chinese vice premier Wu Yi that Beijing would lift its moratorium on new Sino-foreign broking joint ventures (which has stood since September 2006) by the end of the year. In September, Shang Fulin, the country’s top securities regulator, added that the ban would be lifted “soon” – without providing any semblance of a timeline.
China has been playing this game for a year now, and all anyone has got is a year older. Truth be told, it’s not in Beijing’s interest to open its financial markets to foreign interests right now. With the domestic stock markets doing so well, China’s leading brokers – among them CITIC Securities, CICC, Galaxy Securities and Guotai Junan – are finally turning a profit, after years spent struggling just to stay afloat. Those brokerages are also lobbying their masters in Beijing, keen to prevent more foreign banks entering the market.
“Right now, the [domestic] A-share market is doing well, and local securities firms are making lots of money, and the government wants to maintain that situation as long as possible,” says Yi Meng, head of China investment banking at Hong Kong-based investment bank CLSA. “Beijing doesn’t want any more competition right now.”
Beijing cannot afford to look as though it is deliberately dragging its feet – hence the occasional protestations of imminent change from senior officials. But even if the moratorium is lifted by the end of 2007, it’s likely to be at least another 12 months before any new licences are finally approved, and longer still before the likes of Merrill Lynch, JP Morgan, Deutsche Bank and HSBC are allowed to join a handful of foreign rivals in underwriting mainland stock sales. CLSA, Goldman Sachs, UBS and, via a joint venture with CICC, Morgan Stanley, are currently allowed to underwrite securities offerings on the Shanghai and Shenzhen bourses.
With liquidity suddenly so rampant in China, the expansion of the qualified foreign institutional investor (QFII) scheme – the only conduit via which foreign investors are allowed to buy mainland-listed A shares – has ground to a halt. Few now expect the total QFII quota of $10 billion to be enlarged any time soon. “It’s all a game the Chinese like to play with the Americans,” says CLSA’s Yi. “For Beijing, it’s a political game – they have to be seen to be able to compromise. Even if they want to do nothing, they can’t be seen to do nothing.”