Wednesday 29 January 2014

Chinese companies an improving bet for investors

As the global economy gradually recovers, the investment community in London is expecting a vibrant capital market with surges of IPOs and M&A activity. For the City, IPOs of Chinese companies have gained increasing attention from advisers.

However, the question remains: why should Chinese companies list in London as opposed to listing in their own country, or even Hong Kong? What makes the London stock market attractive for Chinese companies to list?

A year of slower, but concrete, growth in China

Over the past year, investors have been aware of the stagnation in growth of the Chinese economy. In 2013 China experienced its slowest growth since 2000, with only 7.6% increase in GDP, and PMI dropped from 52.5% in November to 50.9% in January 2014. This was partly caused by the US Government’s decision to trim the quantitative easing that had previously encouraged inflows of ‘hot’ money into China. The Chinese government has also brought in tighter controls on shadow banking, including non-government backed banks. Shadow banking was a major source of finance for local governments to facilitate projects which were carried out to meet the central government’s growth initiative targets.

Such concerns, however, do not diminish investors’ optimism towards investing into Chinese companies. Many are attracted to the long-term benefits brought about by recent measures introduced by the Chinese government.

Government reforms drive share price as IPO moratorium is lifted

In November 2013, the Chinese government put forward what has been termed as the biggest “reform package” since the 1990s. One of the most significant changes was the relaxation of China’s strict “Hukou” policy (a policy restricting internal migration from rural to urban areas), which is expected to facilitate urbanisation. Another significant change was the easing of the One-Child policy. Both are expected to encourage much greater demands for consumer products in the future.

The Chinese government has long been attempting to rebalance its current export-dependent and investment-intensive economic model to a more sustainable one that will be led by internal consumption. However it will take time for these measures to come into effect. What is certain, however, is that steady growth will continue in China backed up by relatively concrete and sustainable economic activity.

Various industries have benefited from the recent introduction of these new government initiatives with many Chinese businesses enjoying share price increases. Consumer goods shares were amongst the obvious winners. Companies related to baby products, such as HKSE quoted Goodbaby International, as well as dairy products makers Mengniu Diary and Yashili International soared following the reform announcement.

With the Chinese government increasing its green targets to counter the environmental effects of urbanisation, other winners were those in the renewable energy industry. HKSE quoted Wind-farm operator China Longyuan Power Group Corp saw its share price increase by 86% over the year, whilst Hanergy Solar Group Ltd. saw an increase of over 100%.

Industries that are expected to perform well going forward include the insurance industry, benefited by the Chinese government’s relevant tax policies, and exporters, benefiting from the recovering US and European markets.

In late December 2013 China reopened its market for domestic IPOs, following a moratorium imposed by the government in October 2012 as part of an attempt to reform the capital markets in China. As a result, analysts have predicted 2014 will be a good year for the Chinese stock market. Coupled with confidence in the long-term consumer market, it should be an excellent year for Chinese companies to raise funds in China.

Variety and flexibility of listing in London contribute to continuing popularity

Despite these optimistic predictions, however, Chinese companies are still choosing to list overseas and particularly in London.

London certainly provides more exposure for companies that wish to “go global”. For Chinese companies wishing to expand their business to Europe, London is strategically important and is the undisputed City of choice for a European headquarters. The City of London’s strong track-record of dealing with Africa also makes it favourable for Chinese companies wanting to expand their businesses there.

Furthermore, as the world’s most established stock market, the market regulations in London are undoubtedly more predictable and reliable than the Chinese mainland markets. Stock markets in mainland China are still subject to regulatory changes which makes the market less predictable as regulators seek to mitigate overpricing in the market. Recently, five companies which had announced their intention to list in China have retracted their intentions and postponed their IPOs following newly released rules which strengthen government control on stock price valuations.

Another advantage of listing in London is the flexibility of the London Stock Exchange when compared to, for example, the Hong Kong Stock Exchange where the process is comparatively complicated. On average, it takes two years for a company to list on the Hong Kong Stock Exchange. For smaller companies, this might not be a viable option with the time and financial costs involved. London’s Main Market on the other hand is well-known as having a faster listing process whilst maintaining supervision over public companies. London’s Alternative Investment Market (AIM) also provides an important channel for SMEs to list, with simpler listing procedures and the supervision delegated in part to a Nominated Adviser (NOMAD), who project manages the new issue.

The increasing sophistication of AIM has also made it a more appealing option. In 2013, 25% fewer companies left AIM compared with 2012. £881 million was raised in equity, 70% more than in 2012. Government initiatives have now made AIM stocks eligible for placement in ISAs and these additional tax benefits make AIM-shares even more attractive to investors. In addition to this, from April 2014, AIM shares will be the most tax-advantaged of all investments with exemptions from inheritance tax and stamp duty.

London emphasises its pro-China position

David Cameron in China
to promote UK trade, 2013
Source: The Guardian
The UK’s desire to promote trade with China has never been more obvious. Stories on Chinese investment into the country, and vice versa, have been dominating headlines over the course of the past year, followed by David Cameron and Boris Johnson’s multiple visits to the country.

Although the number of Chinese companies listing in London has fallen slightly in recent years, it is anticipated that IPOs of China-based businesses will increase, particularly bearing in mind what London has to offer. Priding itself on being the world’s most established financial centre, London would certainly be a strategic option for Chinese companies wishing to gain access to international investors. The capital markets remain an interesting place to watch as advisers expect greater deal flow from China in the near future.

Canace Wong

Canace is an Account Executive at Abchurch Communications. Brought up in Hong Kong, she is fluent in Cantonese and Mandarin. Canace has a Master’s Degree in Philosophy and Public Policy from the London School of Economics and is a key member of Abchurch’s China and Asia team.

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