Chris Devonshire-Ellis: Foreign Company Listings in Shanghai: The Political Fundamentals

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Op-Ed Commentary: Chris Devonshire-Ellis

May 6 – As we move closer to foreign companies being able to list on the Shanghai bourse, a question that hasn’t yet been addressed is how local market sentiment will move stocks. China’s stock markets still very much perform on emotional data rather than detailed analysis, and the way in which future stocks of international subsidiaries perform in China will be fascinating to watch.

The continued growth in China, coupled with sluggish growth in the United States and Europe, has led the China end of many international businesses to assume far greater importance earlier than had previously been envisaged. It is apparent that multinationals having a tough time of it at home are in many cases reliant on China for growth and a sustained bottom line. Yet how will Shanghai react if say, ACME Inc, with growth of 30-40 percent in China, delivers a poor quarterly report in the United States?

In short, the reality is that even in today’s global economy, much still has to filter down into how companies are valued and their performances rated. Will investor sentiment in a country where much is still bought and sold on hearsay and innuendo be mature enough to analyze the difference between a successful subsidiary in China and problems for the global parent? One should also bear in mind that in China, a whopping 90 percent of all stocks traded in Shanghai are still state-owned. When the same state exercises considerable influence over the regulatory system and the media, the manipulation of stocks by the government cannot be ruled out. How this can affect an international business operating in China may be fraught with issues.

Let’s suggest, for example, that a successful foreign subsidiary, listed in China, has a separate business that gets involved with a deal that China disapproves of. Will the political ramifications mean that local Chinese media, influenced by the state, begin to sell down the China subsidiary in retaliation? While the development of Shanghai as a market to raise domestic funds for mainland expansion is to be welcomed, the real story of how stocks are to perform in China will for some time depend upon that most tricky of fundamentals – political analysis.

For businesses involved with China, in a stock market where sentiment can be turned on and off by the State, the true implications of listing on the Shanghai and Shenzhen bourses will stretch far beyond the raising of domestic finance. How that pans out will be interesting to observe, and will serve as a benchmark as to how globally integrated China really is in terms of overall business fundamentals.

Chris Devonshire-Ellis is the publisher of China-Briefing and the founding partner of Dezan Shira & Associates.

Chris also contributes to India Briefing , Vietnam Briefing , Asia Briefing and 2point6billion

Comments are welcome.