My Blog

December 14, 2007

Mainland Chinese subsidiaries of foreign companies will soon be permitted, at least in theory, to issue stocks and bonds on the mainland markets.  I say “at least in theory” because companies, whether Chinese or foreign, still have to jump through a confusing number of hoops before they are allowed to list, and it is pretty easy for the authorities to prevent any company they want from raising money in the domestic securities markets.  Last week I was having lunch with the CEO of a mainland company here and asked him if he was interested in raising money on the local stock markets.  He said that he was considering doing it for some of his subsidiaries, but that it might take as long as a year between the application and the actual listing.  It is not an easy process and, worse from a business point of view, it is not a particular predictable process.

Still, allowing mainland Chinese subsidiaries of foreign companies to issue stocks and bonds on the mainland markets is a step in the right direction, although like all other major policies in China it is cursed with the ideology of gradualism – i.e. it is really a tiny step forward towards at least four goals that are clearly in the best interests of China.  First, by allowing high quality companies to list on domestic markets, the new measure is likely to improve the quality of companies and financial reports available to Chinese investors.  Second, increasing the supply of stock is a far better way to dampen the incipient bubble than the other, heavy-handed and market-distorting measures that the authorities have preferred. .

Third, this clearly helps the development of Chinese financial markets by improving the professionalism of the issuance base and raising reporting and governance standards.  Finally, and most importantly from the point of view of this blog, it may help the PBoC, albeit only slightly, in managing monetary inflows.  This is because foreign-owned companies that need to increase their capital will not have to import additional foreign exchange through the capital account.

It is a little strange to me that these new regulations came out at then end of the third China-US SED meeting between US Treasury Secretary Paulson and his Chinese counterparts, as if they were a form of concession offered to the US – the South China Morning Post in an editorial today called it “one of (China’s) bigger concessions”.  I can’t think of any reasons why this move hurts China and many reasons why it helps, so why is it a concession? 

On the other hand I would argue that the US “concession” to the Chinese, reportedly making it easier for Chinese banks to acquire stakes in US financial institutions, isn’t much of a concession either, if a concession is something you give up to obtain something else.  One of the greatest strengths of the US economy and its financial system is its openness, to Americans and foreigners alike.  Allowing Chinese institutions to participate in that process is unquestionably a good thing for the US, in my opinion.  The US and China shouldn’t need bilateral negotiations to do what is in their best interests anyway.

Comments (3) for "Foreign companies can raise ...

This is just a political show. Give something to the friends in the other side to help them win their arguments domestically. Paulson needs to show that he can make progress through talk. Beijing needs to show the people that they do not bow to the foreign pressure. By fatbrick - 12/13/2007 9:59 PM

Why is allowing Chinese state banks (or the Chinese state) to own US banks necessarily a good thing? China very clearly uses its state banks to achieve policy as well as commercial goal -- most obviously right now China uses the banks as a took for below market sterilization. Now in practice the US may not be conceding much, as the promise to treat Chinese banks like other banks is effectively the United States current policy, and I rather doubt a controlling Chinese state bank stake (or a CIC stake) in a large US institution would pass regulatory muster -- the USG is probably less impressed with the health of Chinese banks than the equity market. But it does seem to me that allowing a government that uses its own state banks to achieve its domestic policy goals to own banks abroad raises a host of difficult issues. By bsetser - 12/14/2007 1:43 AM

I doubt that anyone is thinking about letting PRC entities buy stakes in US banks. What people have in mind for the immediate future are more like a minority interest (similar to what US banks have with Chinese banks). Long term (i.e. in 10 to 15 years), I'm pretty sure that the big Chinese banks are thinking about doing what ABN-Amro did with LaSalle Bank. It's important to distinguish the Chinese government as "owner" with the Chinese government as "regulator." When the Chinese government has used the banks to achieve policy goals it's been with the "regulator" hat and not the "owner" hat. The regulations that force sterilization come through the PBC and not from the Ministry of Finance through CIC. Hypothetically, if there were a major private Chinese bank, it would have to abide by the PBC's regulations in this area. Conversely, CIC doesn't have the legal authority to directly force a bank to buy sterilization bonds, and there are some layers of insulation that make this difficult to do practically. Also what the PRC is doing with its banks doesn't seem that different from what the United States was doing with Regulation Q between 1933 and 1980 (i.e. capping interest rates for policy reasons, namely to provide cheap financing to encourage home ownership) or other things that the US has done historically (i.e. prohibiting interstate banking to promote local community investment or prohibiting bank ownership of corporations). For that matter what the PRC is doing now doesn't seem that different from what the Fed does in enforcing reserve requirements and risk management to insure macroeconomic stability. By Twofish - 12/15/2007 5:51 PM