HSBC faces problems going back to its Shanghai roots
Tom Holland 04 September 2009
HSBC wants to return to its roots.
In recent months bank executives have repeatedly said they want to list shares in HSBC Holdings on the Shanghai stock exchange.
By selling shares to local investors, the bank would be making a major demonstration of its commitment to the future of the mainland market, something that would be bound to go down well with the authorities.
And being among the first multinationals to list in China would do a lot to burnish HSBC’s brand in the domestic market, while gaining the bank access to a deep pool of local currency capital to fund the expansion of its mainland business.
Yet despite media reports confidently predicting a 50 billion yuan share issue as early as the first half of next year and even naming likely lead managers for the offering, securing a Shanghai listing could take HSBC a lot longer than most people expect.
The main obstacle is not foot-dragging by mainland securities regulators, although the authorities would not want a big HSBC offering to crowd local companies out of the capital market.
The real problem is China’s capital controls.
Beijing forbids the free flow of funds across the mainland’s borders. As a result it is not possible to arbitrage away price differences that open up between securities in the onshore and offshore markets.
That can lead to enormous distortions. The first chart shows the Hang Seng China AH Premium Index, which tracks the price differential between mainland-listed stocks and Hong Kong-listed shares in the same companies. On average over the past three years, mainland shares have traded at a hefty 40 per cent premium to their Hong Kong counterparts, although at times the differential has exceeded 100 per cent.
For HSBC, such a huge discrepancy between otherwise identical shares, and the resulting inequality between shareholders, would be acutely embarrassing.
“We wouldn’t want to have a huge difference in price between markets,” says Asian regional chief executive Sandy Flockhart.
To avoid that, HSBC shares listed in Shanghai would have to be fungible with stock listed elsewhere. “Transferability of shares between registers is key,” Flockhart insists.
That could be a problem. If an investor could buy shares with yuan in Shanghai, and then sell them in Hong Kong, he would have shipped money offshore, effectively bypassing the mainland’s capital controls.
There are few signs the authorities are going to allow that any time soon. During the Asian crisis of 1997 Beijing learned the importance of relaxing capital restrictions only after floating its currency.
And at the moment, it has no intention of floating the yuan. On the contrary, for the past year Beijing has kept the currency rock steady against the US dollar in order to help out the ailing export sector and to act as a price anchor.
As a result it could take a long time before the authorities are ready to crack open the capital account even a little bit more by allowing investors to arbitrage between onshore and offshore stock markets. That means HSBC’s mainland listing could be take a lot longer than the reports suggest. As Flockhart admits: “This could slip”.
Returning to your roots is seldom straightforward.
Yesterday, China agreed to buy US$50 billion worth of bonds denominated in special drawing rights from the International Monetary Fund. Inevitably the pact triggered reports that Beijing is moving to diversify its foreign exchange reserves away from the US dollar.
Unfortunately, the diversification benefits will be limited. The amount is less than 2.5 per cent of China’s reserves. And because the dollar makes up 41 per cent of the SDR basket (as of Wednesday), if China pays for its notes in dollars, it will be shifting just 1.4 per cent of its reserves out of the greenback. That is less than it accumulates in an average month.
And as the second chart shows, although the SDR has held its value against the yuan better than the dollar has since revaluation, it has been considerably more volatile. As a result, reserves held in SDRs could easily fall in value over the short term.
The real reason China is buying the IMF’s bonds is not to diversify its reserves, but rather to buy itself a gold card membership of the international financial club. That way it will make sure it has a seat at the top table when governments finally get around to redesigning the global financial architecture.
2 comments:
HSBC faces problems going back to its Shanghai roots
Tom Holland
04 September 2009
HSBC wants to return to its roots.
In recent months bank executives have repeatedly said they want to list shares in HSBC Holdings on the Shanghai stock exchange.
By selling shares to local investors, the bank would be making a major demonstration of its commitment to the future of the mainland market, something that would be bound to go down well with the authorities.
And being among the first multinationals to list in China would do a lot to burnish HSBC’s brand in the domestic market, while gaining the bank access to a deep pool of local currency capital to fund the expansion of its mainland business.
Yet despite media reports confidently predicting a 50 billion yuan share issue as early as the first half of next year and even naming likely lead managers for the offering, securing a Shanghai listing could take HSBC a lot longer than most people expect.
The main obstacle is not foot-dragging by mainland securities regulators, although the authorities would not want a big HSBC offering to crowd local companies out of the capital market.
The real problem is China’s capital controls.
Beijing forbids the free flow of funds across the mainland’s borders. As a result it is not possible to arbitrage away price differences that open up between securities in the onshore and offshore markets.
That can lead to enormous distortions. The first chart shows the Hang Seng China AH Premium Index, which tracks the price differential between mainland-listed stocks and Hong Kong-listed shares in the same companies. On average over the past three years, mainland shares have traded at a hefty 40 per cent premium to their Hong Kong counterparts, although at times the differential has exceeded 100 per cent.
For HSBC, such a huge discrepancy between otherwise identical shares, and the resulting inequality between shareholders, would be acutely embarrassing.
“We wouldn’t want to have a huge difference in price between markets,” says Asian regional chief executive Sandy Flockhart.
To avoid that, HSBC shares listed in Shanghai would have to be fungible with stock listed elsewhere. “Transferability of shares between registers is key,” Flockhart insists.
That could be a problem. If an investor could buy shares with yuan in Shanghai, and then sell them in Hong Kong, he would have shipped money offshore, effectively bypassing the mainland’s capital controls.
There are few signs the authorities are going to allow that any time soon. During the Asian crisis of 1997 Beijing learned the importance of relaxing capital restrictions only after floating its currency.
And at the moment, it has no intention of floating the yuan. On the contrary, for the past year Beijing has kept the currency rock steady against the US dollar in order to help out the ailing export sector and to act as a price anchor.
As a result it could take a long time before the authorities are ready to crack open the capital account even a little bit more by allowing investors to arbitrage between onshore and offshore stock markets. That means HSBC’s mainland listing could be take a lot longer than the reports suggest. As Flockhart admits: “This could slip”.
Returning to your roots is seldom straightforward.
Yesterday, China agreed to buy US$50 billion worth of bonds denominated in special drawing rights from the International Monetary Fund. Inevitably the pact triggered reports that Beijing is moving to diversify its foreign exchange reserves away from the US dollar.
Unfortunately, the diversification benefits will be limited. The amount is less than 2.5 per cent of China’s reserves. And because the dollar makes up 41 per cent of the SDR basket (as of Wednesday), if China pays for its notes in dollars, it will be shifting just 1.4 per cent of its reserves out of the greenback. That is less than it accumulates in an average month.
And as the second chart shows, although the SDR has held its value against the yuan better than the dollar has since revaluation, it has been considerably more volatile. As a result, reserves held in SDRs could easily fall in value over the short term.
The real reason China is buying the IMF’s bonds is not to diversify its reserves, but rather to buy itself a gold card membership of the international financial club. That way it will make sure it has a seat at the top table when governments finally get around to redesigning the global financial architecture.
Post a Comment