Korea Capital Market Institute

This paper looks at characteristics of the Chinese stock market and stock market performance and explores how foreign firms can list their stocks at the current stage. Based on a systematic study on the current status and future outlook of the International Board, which will be launched in the Shanghai Stock Exchange (SSE), we provide implications for Korean firms that want to go public in China`s capital markets. 1. Current status and evaluation of China`s stock market China first established its stock exchanges in Shanghai and Shenzhen in 1990 and 1991, respectively. Both exchanges are supervised by the China Securities Regulatory Commission (CSRC) under the State Council. Hong Kong has a separate stock exchange, the Hong Kong Exchange. Stock markets in mainland China have grown rapidly for the past 20 years: In terms of market capitalization, SSE is the second largest in Asia and the sixth largest in the world. However, the ratio of GDP to market capitalization stands at 47.3% for SSE, and 22.8% for Shenzhen Stock Exchange (SZSE), demonstrating that China`s capital markets are relatively small. Although China`s stock markets are connected to global markets to some extent, synchronization is still at a low level, compared to that between developed economies. China`s stock market PER is relatively higher than other markets around the world. 2. How foreign firms list stocks on China`s stock markets Currently, there are three ways that a foreign firm can list its stock on China`s A share market: Establish a foreign invested enterprise (FIE) and list; merge or acquire shares of a Chinese firm that has been already listed; and list stocks on the International Board that will be established in the Shanghai Stock Exchange. Another option is to list stocks on the Hong Kong Exchange and indirectly enjoy the positive effects of listing on the A share market. The most common and general way for foreign firms is the first one: Establish an FIE. No legal barriers have been placed on FIE listings on the A share market. In principle, any FIE that meets the A share issuing standard can go public. In March 2002, China devised the listing procedures when it enacted special regulations on public offering subscriptions by FIE. Aside from direct listing through an FIE, there are other ways. A foreign firm may turn to a back door listing by acquiring shares of a listed company. In this case, the foreign investor goes ahead with M&A either as a foreign corporation or a Chinese corporation, and the firm has to face different regulations according to its status. Instead of direct listing on the mainland market, which takes a long time to get through many regulations and restrictions, foreign firms may choose an indirect listing through the Hong Kong market. For a Korean firm who has its business in China, or has relations with China, listing its stocks on the Hong King Exchange will enhance its reputation in the Chinese market. Furthermore, to keep pace with the long term goals, such as yuan internationalization and advancing Shanghai into a global financial center, China is planning to establish the International Board. 3. Implications for Korea Listing stocks on China`s A share market could give Korean firms ample opportunities to diversify their financing sources and to grow in the promising Chinese market. Specifically, Korean firms who are already in business in China will benefit from listing on the Chinese market because this will draw attention from Chinese investors and media, as well as give Korean firms publicity. As Korea`s dependence on China increases, what Korea needs is in-depth analysis on the Chinese financial markets and more flexible measures to respond to future changes. It is necessary to strengthen cooperation in the financial sector between Korea and China. To do so, Korea should make efforts to publicize Korean companies to Chinese financial authorities and investors, and also actively participate in China`s efforts to establish the International Board. Such efforts will surely give Korean companies an edge: Korean companies will be able to list their stocks earlier than other competitors, and this will maximize the positive effects of listing.