Foreign Company Stocks to be Sold in China

According to a recent agreement, investors in China will be able to do something that's been forbidden ever since stock markets opened 17 years ago in the Communist market economy: buy foreign stocks and bonds locally.

The deal, reached on Dec. 13 - the concluding day of the Third China-U.S. Strategic Economic Dialog, held in Beijing - states that the PRC will allow "qualified" companies to sell shares in the local currency, the yuan (renminbi); locally incorporated foreign banks will be given permission to sell bonds.

As is often the case with such agreements in China, the language is vague and few details are given. It is unknown when these stocks and bonds will start being sold, for example, and how a foreign company will qualify. But by shaking hands on it, Beijing has committed itself to this course of action. It's now only a matter of when and how it will happen.

For foreign firms and Chinese investors alike, this development is hugely significant. Foreign companies that are doing business in China (and it's assumed only these will "qualify") will be able to raise money locally to expand their operations. They will no longer have to rely solely on profits generated in China (which can take years to even appear) or cash infusions from their headquarters abroad. This will help level the playing field against local rivals that have been able to sell shares for years. Chinese investors will also benefit because they will finally get a chance to own a piece of a foreign company they've always wanted to invest in.

The investment pool foreign firms will be able to tap into is huge. China's stock markets currently trade US$4.2 trillion worth of equities, according to Bloomberg News. This makes it the second largest in Asia, after Japan. (It surpassed Hong Kong's stock market just this year.) Chinese equities have risen five-fold in value over the last two years, according to BusinessWeek, making it the best performing stock market in the world, in 2007.

Which foreign companies will make the cut? It's anybody's guess, but it's most likely that Europe's largest bank, HSBC, Hong Kong's Hang Seng Bank Ltd., Coca-Cola Co. and Siemens AG (a German firm) will be the first to sell shares locally.

If these firms do get the go-ahead and begin plying their stock in the near future, it may be at the top of the market. China's CSI 300 index is worth more than twice as much as the S&P 500 Index, Japan's Nikkei-225 Stock Average and Hong Kong's Hang Seng Index (as a multiple of 2007 estimated earnings), according to Bloomberg News.

(Other sources: Thomson Financial News, China Daily)