Issuing Company Shares in China: Opportunities and Challenges for Domestic and Foreign Firms
This article aims to provide a comprehensive idea of how issuing company shares in China works.
China’s financial markets were once off-limits to foreign investors, but that has changed over the last few decades. However, fresh initiatives have been undertaken to bring some of China’s most valuable enterprises that are now listed on foreign stock markets back to the mainland.
The World Bank estimates that China’s GDP has grown by over 10% yearly since 1978. In addition, as of February 2022, the nation will have around 18.47% of the global population as its residents. This is why understanding the importance of the Shanghai and Shenzhen Stock Exchanges and other relevant operations of the Chinese equity market becomes crucial.
This article aims to provide a comprehensive idea of how issuing company shares in China works and the kind of opportunities and risks you can expect in the pursuit.
Issuing company shares in China
In 2020, the entire market value of China’s stock markets reached RMB 79 trillion, which is equivalent to $12.2 trillion. This makes China’s stock markets among the biggest in the world. The fast expansion of China’s high-tech industries needs access to capital, and this is where the country’s stock markets come in. Let’s understand the Chinese equity market better in the following section.
A brief overview of the Chinese equity market
There isn’t a more fascinating market than China right now. Foreign investors take advantage of the country’s rising prosperity and bright economic prospects. Investing in China via a China equities fund is a simple option for Non-Chinese investors. But there are still numerous reasons to be concerned, and many of them have to do with the country’s precarious economic, political, and institutional settings.
There are three stock exchanges in China, making it the second biggest stock market in Asia. These markets include the Hong Kong Stock Exchange (HKSE), the Shanghai Stock Exchange (SHSE), and the Shenzhen Security Exchange (SZSE). The stocks that are traded on each market also vary.
The SHSE specializes in oil, electricity, and telecommunications firms, while the SZSE is more akin to the NASDAQ in its emphasis on high technology and so-called growth enterprises. The HKSE, on the other hand, is the most diverse of the three stock exchanges. In comparison to the other mainland exchange, the SHZE is smaller and has lower trading volumes.
Importance of the Shanghai and Shenzhen Stock Exchanges
When the Chinese government wanted to modernize the country’s economy, it established the SHSE and SZSE in 1990. The Hong Kong Major Exchange is being merged with the other major markets in China. Therefore, HKSE might be considered a subsidiary of China’s stock exchange.
Shanghai Exchange is the biggest stock market in China. In 2016, its market value was $4.1 trillion. The majority of the listed firms are massive, state-owned corporations that have contributed significantly to China’s economic development. Retirement funds and financial institutions make up the bulk of investors. Shanghai, the financial center of China, is home to the SHSE.
The Shenzhen Exchange is one of China’s secondary markets. In April 2015, its market valuation was $3 trillion. The SZSE is located in Shenzhen, Guangdong, a highly developed city in China. Smaller, more entrepreneurial businesses are traded on the Shenzhen Stock Exchange.
The expansion of these industries is vital to China’s ongoing economic transformation. These privately held firms outperform their government-owned counterparts in terms of creativity and financial success.
Opportunities for Domestic Firms
China’s tremendous economic development in recent years may be attributed in large part to the country’s robust banking industry, which has been instrumental in funding Chinese businesses. However, excessive investments into alternative saving vehicles like real estate have caused numerous expensive economic inefficiencies without a strong stock market.
The fundamental engine of China’s continuous economic development is the country’s consumer and service sectors, as well as its high-tech companies; the stock market is a crucial source of financing for these sectors. The following are the opportunities that the Chinese equity market provides for domestic firms.
- Access to domestic capital markets and potential for growth and expansion – Closing off parts of China’s economy to international investment is certain to hurt European as well as other foreign businesses’ chances of making a profit there. Providing a large but safe haven for Chinese corporations to expand without the threat of global competition and then venture into foreign markets with vigor might be detrimental to European businesses as well. Companies that operate in a sheltered domestic market are more likely to earn revenue and profits than their counterparts operating in an unrestricted foreign market.
- Support from the Chinese government and regulators – Companies in China are encouraged by the government to list on the country’s domestic stock markets. Among them are initiatives to educate investors, promote market stability, and reduce the burden of listing processes and listing charges, as well as tax benefits and other favorable policies. The goals of these endeavors are to stimulate the economy, make businesses more competitive, and entice investors.
- Improved corporate governance and transparency – Having a presence in the Chinese equity market increases the legitimacy of a local company, which in turn attracts investors, consumers, and business partners. It demonstrates the company’s commitment to being open with its finances, following the rules and practicing good corporate governance. This improved standing may lead to new partnerships and greater business success. It can bring in new stakeholders and opens up new doors for expansion.
Challenges for Domestic Firms
You may assume that selling domestically, rather than internationally, is simpler for local businesses everywhere. China, however, is a nation where regional disparities in consumer choices are quite visible. Despite three decades of economic changes, Chinese leaders claim China remains a “socialist-market economy”. This suggests that the government enables free market forces to expand the economy in certain sectors but still has a big role in economic growth. Here are a few challenges for domestic firms in the Chinese equity market.
- High competition for capital and investor attention – To succeed in China’s domestic market, local businesses must have an in-depth familiarity with the tastes and requirements of potential foreign investors. There are a plethora of participants in the Chinese equity market, making it very competitive. Local investors may encounter stiff competition from both local and international enterprises, necessitating the development of unique products and approaches.
- Strict regulatory environment and compliance costs – Many Chinese banks are owned or controlled by the government. Financial experts hold China’s restricted capital account responsible for the country’s mounting debt. For a long time, the Chinese government restricted both incoming and outgoing money to stabilize the value of the renminbi relative to the dollar and other major currencies and so increase exports. Many say that China’s capital flow limitations have altered financial markets, causing overinvestment in real estate and underinvestment in services.
- Lack of international exposure and market recognition – Even though the Chinese equity market has several potentials, the country’s low international exposure may prevent it from expanding internationally and attracting foreign investors. A smaller pool of investors and less access to foreign money might come from a lack of brand awareness outside of China. To get beyond this obstacle, local companies can seek out collaborations abroad, show up at international conferences, and use digital tools for promotion and brand development.
Opportunities for Foreign Firms
Most observers still regard the Chinese equity market to be an emerging one, and the nation still places much more limitations on entry into the market than other mature markets do. Nonetheless, recent events have demonstrated that China is determined to proceed on the road of opening up its financial markets to the world.
Other schemes, including Bond Connect with Hong Kong, have also been launched to boost cross-border trade. In addition to bolstering relations with abroad regulators to oversee the listing of Chinese businesses on overseas stock markets, the China Securities Regulatory Council (CSRC) has said that it would continue to investigate ways to enhance and broaden the present Stock Connect programs. Let’s understand the opportunities provided for foreign investors and firms in the Chinese equity market.
- Access to a large and growing consumer market – With its increasing buying power, rising middle class, and massive population, China is the world’s second-biggest retail market and is expected to overtake the United States as the largest retail market shortly. In the coming decade, experts predict that foreign investors will be able to capitalize on China’s vast consumer market, developed infrastructure, and robust industrial base.
- Opportunity to diversify funding sources and raise capital in local currency – Foreign firms may improve their financial stability, market position, and market conditions in China by diversifying their financing sources and obtaining money in the local currency. This allows them to better coordinate their finance with their core business functions and hedge against currency fluctuations. By raising funds in the local currency, a company shows its dedication to the Chinese equity market and earns more respect from Chinese stakeholders. Foreign enterprises may also tap into China’s massive cash pool to fuel their expansion and strategic objectives by fundraising in China.
- Improved market exposure and credibility – Having an operational presence in the economy that ranks second globally sends a message of confidence to investors, clients, and business partners throughout the globe that you’re serious about entering the Chinese market. Foreign companies may boost their brand’s recognition and market share in China by capitalizing on their activities there. They may also benefit from the scale and prestige of the Chinese equity market to get access to new clientele, business alliances, and investment possibilities.
Challenges for Foreign Firms
Many international companies, frustrated by the stagnation of Western economies, have decided to set their sights on China as a place of development. However, growing into China through conventional tactics may be time-consuming and expensive.
Foreign businesses hoping to get into the Chinese market may encounter difficulties due to shifting international dynamics, local tastes, and government policies. Thus, business experts advise working with local companies and HR specialists to navigate China’s market entrance hurdles.
The following are a few challenges you may face as a foreign investor or company founder, hoping to launch your company in China.
- Limited access to certain sectors and industries – It might be challenging for a foreign firm to evaluate local markets, find the best distribution channels, and keep up with the relevant rules. One of the greatest difficulties in entering the Chinese market is gaining access to the relevant sectors and industries. A foreign company looking to get into the Chinese equity market must first do extensive market research and identify the most effective distribution methods.
- Stringent regulatory requirements and government approval processes – Numerous international companies find it challenging to comply with stringent regulations and a general lack of openness. Companies are hampered in their ability to freely bring in or take out cash due to the need for strict adherence to a ‘closed’ capital account policy. Due to the hassle and expense of complying with rules, international investors are discouraged from setting up shop in China or, in certain circumstances, separating their Chinese corporation from their overseas entity.
- Language and cultural barriers – To get into the Chinese market, international enterprises must overcome the language barrier. Chinese is not only a language but rather an intricate linguistic system. There are several Chinese dialects besides Mandarin and Cantonese. While many Chinese can speak English, international businesses have found it difficult to interact with Chinese clients due to differences in accent and language use. A reliable translation can also help people communicate more effectively across cultures. Many characteristics of Chinese culture need a change in terminology or attitude while communicating with Chinese people.
Cross-Border Listings and Depository Receipts
Depository receipts and cross-border listings provide international businesses with the chance to access Chinese financial markets and raise money from Chinese investors. China has set up several channels for international firms to access its financial markets. Foreign companies operating in China may make use of the following cross-border listing and depository reception options.
When a company is cross-listed, it is listed on the stock market of both its home country and another nation. When the same assets are listed on two distinct exchanges, arbitrage possibilities might arise as a result of a Cross Border Listing. A Chinese corporation, for instance, would make the most sense for the Shanghai Stock Exchange to be its primary listing. If it is successful in getting a cross-listing on the New York Stock Exchange, its shares will become more liquid and accessible to investors in the United States. The corporation, like every other business, must fulfill the standards of the exchange to be listed there.
Chinese Depositary Receipts (CDRs) are certificates issued by banks that stand in for shares of overseas corporations. Thus, a CDR is a custodian bank’s certificate representing a Chinese exchange-traded pool of foreign equities. To facilitate the trading of foreign equities on the Chinese mainland, Chinese officials created CDRs based on the American depositary receipts used in the United States.
Since China’s IT giants have usually chosen to list on international exchanges rather than in their domestic market, the intention behind the issuance of CDRs is to bring foreign investment back to China to propel the country’s economy forward. CDRs open the door for individual and institutional investors in China to buy shares of overseas firms.
Benefits and Challenges
There are several advantages and challenges regarding Cross-Border Listings and Depository Receipts:
- Through DRs and cross-border listings, international firms may get exposure to, and perhaps raise funds from, a sizable group of Chinese investors.
- A Chinese listing provides global companies with a gateway to the Chinese market and the chance to attract a larger pool of investors.
- Foreign businesses may have difficulties adhering to Chinese regulatory standards, such as disclosure laws, reporting requirements, and continual oversight.
- Investor sentiment and market fluctuations may affect overseas companies listed in China due to variables such as local economic conditions and regulatory changes.
Issue company shares with Eqvista!
By issuing shares in China, global companies get access to China’s massive and growing market, opening up exciting growth prospects and garnering the attention of Chinese investors. Understanding the regulatory environment and meeting compliance obligations may be complicated, but tools like Eqvista can help. Companies may effectively manage their shares and communicate with Chinese investors using Eqvista’s cap table administration, issuing company shares in China, and shareholder interaction features. Through our guidance, your international business may successfully issue shares on the Chinese stock exchange.