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Too many cooks spoil the (China reform) broth

By John Loh
06 Jun 2018

China has had a busy fortnight in capital reform, with its long-awaited entry into MSCI, and progress in plans for Chinese firms to list in London and Frankfurt. Yet it is becoming clear that regulators should focus on Hong Kong links, rather than opening up new markets.

MSCI’s inclusion of A-shares in its emerging markets indices on June 1 has dominated headlines, crowding out updates on the seeming progress China is making on several primary market links with the UK and Germany.

After four years, the London-Shanghai Stock Connect could soon be ready to make its debut. China and the UK will launch the first product under the scheme before the end of the year, Fang Xinghai, vice-chairman of the China Securities Regulatory Commission, told a forum in Shanghai.

Yi Gang, the People’s Bank of China governor, said the London-Shanghai link will be open for business later this year, hailing it as one of the reforms that reflect China’s willingness to develop onshore financial markets.

Chinese regulators have also been readying a scheme to list D-shares of mainland companies in Frankfurt through the China Europe International Exchange (Ceinex), a joint venture between the Shanghai Stock Exchange, China Financial Futures Exchange and Deutsche Börse. While the London Connect will be based on depositary receipts, Ceinex listings are expected to resemble Hong Kong H-shares where mainland-incorporated companies list offshore.

Qingdao Haier, China’s largest manufacturer of home appliances, said in April it would sell 400m D-shares in its Ceinex debut.

If all this sounds confusing, then it probably is. In the case of the London plan, for as long as it has been mooted, market observers have been scratching their heads over its sheer lack of commercial viability. The regulators may view all these efforts as complementary to China’s opening up, but the net effect is a dilution of market-oriented reforms.

Quick win

The existing Stock Connects between Hong Kong, Shanghai and Shenzhen mean the secondary market for equities is already well served. With the MSCI inclusion, international institutional investors can get all the A-share access they need, at least as far as cash equities are concerned.

Where access is lacking is in the primary market. With plans for an IPO Connect still up in the air, China has pursued London Connect and D-shares as alternative avenues to let overseas investors gain exposure to new issuance of stock by mainland firms.

In the meantime, Hong Kong has passed its own listing reform to let issuers with dual-class shares and those from the biotechnology sector sell shares in the city, giving Chinese firms yet another fundraising option.

Unsurprisingly, the Hong Kong proposal is the only one that has achieved any measure of success, given its adherence to international market practice and well-conceived regulatory framework. By comparison, China’s latest pilot schemes risk ending up as political vanity projects that do not meaningfully expand market access into China.

Few would dispute that market reform is a priority for China, but drawing up ever more experimental solutions is not the answer.

A quick win for the primary market would be to build on the success of the Hong Kong-to-mainland links by allowing the IPO Connect to work. With both A- and H-shares gaining prominence, it would be a waste for investors to continue to miss out on primary opportunities.

The hurdles to this are not insignificant, as senior regulatory officials have highlighted. But China has shown it can muster political and legislative will when it has to, as demonstrated recently by its China Depositary Receipts plan and the speedy launch of Bond Connect last year.

In the long road to opening up China’s market, what is needed is not a cocktail of measures but rather a single shot, clear and well-distilled. 

By John Loh
06 Jun 2018