Foreign Businesses Permitted to List in Shanghai

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SHANGHAI, Apr. 30 – China’s State Council yesterday approved plans to permit, on a trial basis, overseas companies to list on the Shanghai stock exchange.

The ratification allows foreign companies to list on the exchange, to use RMB for trade settlements, and to float shares in RMB denominated bonds. The government also permitted Shanghai to liberalize its financial derivatives markets, as China seeks to gradually ease Shanghai into position as a bone fide international financial center. China’s domestic banks are now preparing for trial runs in trading such bonds. This step also paves the way for the Chinese yuan to eventually move towards a fully convertible currency, currently one of the major stumbling blocks in positioning Shanghai internationally. The year 2020 has been suggested.

Listing in Shanghai is likely to be attractive to foreign businesses expanding operations in China, in order to raise domestic capital to fund domestic expansion. Currently such investments require foreign injected capital, posing a greater risk to boards of directors and shareholders who are not resident in China. The move is unlikely to cause ripples in Hong Kong, which has been the de facto international financial center for the nation since its return to China in 1997. Hong Kong’s position as a gateway for Chinese businesses to raise capital on international markets is likely to remain intact, while Shanghai is to be used as a domestic financing center. It is extremely unlikely that companies currently listed in Hong Kong would seek to move their operations or to raise money in Shanghai unless it was for purely China investment requirements.

Several overseas businesses however have expressed interest in a potential Shanghai listing, including several Hong Kong based banks, amongst them HSBC, Hang Seng Bank and the Bank of East Asia, while the DBS Group, the investment arm of the Singapore government owned Development Bank of Singapore, along with Henderson Land and Russia’s Gazprom have all been touted as potential Shanghai listings.