China's corporate champions are coming home--and investors are cheering. In early July, oil giant China Petroleum & Chemical Corp. (Sinopec), which is already traded in Hong Kong and New York, raised $1.4 billion on the Shanghai exchange in the largest-ever mainland stock offering. The successful listing gave Chinese investors, including the fledgling state pension fund, their first chance to buy shares in a premier domestic company.
Chinese officials hope the listing will help modernize China's unruly Shanghai and Shenzhen bourses. The idea is that the "Big Macs"--local jargon for big-cap stocks--will pull in long-term institutional investors, force smaller companies to improve accounting standards, and bring sanity to the local markets, where valuations are unsustainably high.
"CRITICAL." Investors will get another chance to bite into a Big Mac when PetroChina does a $1.8 billion share issue in coming months. To be sure, two companies cannot transform an entire market. But their homecoming could accelerate a process that in time will make investing in China's markets less of a dice roll. Such listings are "very important," says Credit Suisse First Boston economist Dong Tao in Hong Kong. "It's critical for China to develop its capital markets."
China's bourses sorely need companies of Sinopec's size and quality to class up their act. The small and midsize companies that mostly list on the exchanges have very few shares outstanding. These thin floats make it easy for speculators to scoop up shares, ramp up the price--then dump the stock when it's time to move on to the next rigged game. The companies themselves get in on the shenanigans.
With big companies like Sinopec, such games are harder to play. Sinopec's books are among the cleanest of any Chinese company, since it has to answer to U.S. regulators. And speculators don't have deep enough pockets to corner Sinopec's stock. As a result, says Hu Shaodong, managing director of Shanghai fund manager Heartland Investment Consulting Co., "it's hard to manipulate the price."
Besides helping cleanse the market, Big Mac stocks will provide an outlet for Chinese investors. With billions in assets at its disposal and a fast-growing retiree population to sustain, China's pension fund would love to invest in big-cap stocks. So, too, would insurance companies, which are limited to buying mutual funds but may soon be allowed to buy stocks directly. Shenzhen-based PingAn Insurance Co., the nation's No. 2 underwriter, has some $9 billion languishing mainly in low-interest government bonds and savings accounts. "The equity markets could be very valuable to us," says Dash Chine, assistant general manager of PingAn's investment arm.
High turnover and a combined market cap in Shanghai and Shenzhen of more than $650 billion mean there's ample liquidity for big issues, despite the fact that the state owns about two-thirds of all listed shares. Says Xu Xiaonian, director of research at investment bank China International Capital Corp. in Beijing: "The Chinese market now has quite a big capacity to absorb large offerings." Big, but not infinite. PetroChina CFO Wang Guoliang thinks the market needs "a reasonable time gap" to digest Sinopec before PetroChina's mega-issue.
While domestic listings are a good way to raise money cheaply, overseas markets are still where the prestige lies. Bank of China, Air China, and China Aluminum all plan foreign listings, which bring instant credibility. At the same time, adds CICC's Xu, tighter disclosure standards and shareholder pressure from abroad "help them grow into internationally competitive companies."
Mainland bourses have started to clean up their act, from delisting chronic money-losers to penalizing stock manipulators. Things should only improve as more Big Macs list. In the wings are China Mobile, China Unicom, and the Bank of Communications. These companies have real earnings and real operations. With luck, they will help turn Shenzhen and Shanghai into bona fide markets.
By Alysha Webb in Shanghai, with Mark L. Clifford in Hong Kong