China's int'l bourse likely to face challenges

HONG KONG, July 29 (Yonhap) -- China's expected launch of a special bourse for foreign companies will likely face some challenges as the country's financial markets are not fully developed, a think tank said Friday.
The Shanghai Stock Exchange, one of the two bourse operators in mainland China, has been preparing to start an "international bourse," on which shares of companies with foreign capital can be issued and traded.
The Chinese Academy of Social Sciences said in a report that the listing of foreign companies could hurt Chinese firms as local investors might prefer to put their money in firms from more developed economies.
"Local companies, especially small and medium enterprises, often face difficulty getting funding," said Yin Zhentao, researcher at the Academy. "The opening of the international bourse could lead to foreign firms' occupation of financial resources in the country, which in turn will delay the listing of the local companies that have strong potential to grow."
The researcher said some foreign firms will possibly abuse the international bourse as a "cash dispenser," as Chinese investors tend to overvalue the companies listed on the local bourses, resulting in the higher price-to-earning (P/E) ratio.
High P/E ratios are typically assigned to companies that are growth companies and have high expectations placed on their earnings.
"It will be much easier for the firms to raise a large amount of money in the short-term," Yin said.
The think tank also said in a report that an immature globalization of the financial market might bring disorder in the existing Chinese stock markets.
"The volatility of the global financial markets will easily be transmitted to the local markets through the international bourse, as many foreign firms that are planning to enlist at the Chinese market are already being traded on the overseas bourses," the report said. "The Chinese investors will be more easily swayed by the overseas market situations."
The Chinese authorities will face a challenge of having to come up with proper regulations to protect local investors from unnecessary losses, the report said.
"It will be important for the regulators to monitor and prevent illegal activities of the foreign firms and to secure measures to provide the Chinese investors with enough information on the listed foreign firms," the Academy said.
China has been aggressively seeking to modernize its financial system, particularly to transform Shanghai into an international financial center by 2020.
As part of such a move, China considered an international board to let foreign firms float on the domestic market, but the idea was placed on the back burner amid worries about a stock glut in the country.
In 2009, however, the State Council, or China's Cabinet, issued guidelines for letting overseas firms sell shares and bonds in Shanghai, reviving the idea.
About 10 foreign and overseas-listed Chinese companies will form the first batch of pilot firms to list on the Shanghai international board, according to the Chinese government's draft plan.
A number of foreign companies with extensive operations in China including HSBC Holdings Plc. and Procter & Gamble Co. have expressed an interest in listing on the board.
Several Hong Kong-based firms such as Bank of East Asia Ltd. and Hutchison Whampoa Ltd. are also looking into listing their stocks in Shanghai.