Opening Up 4.0?
COVID-19 and China
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China's commitment to the course of reform and opening-up spans various domains, being especially strong in the fields where it has competitive advantages. One example is the international trade that has been fueling the country's economic growth since the last quarter of the 20th century.

As for the equity market, which is widely considered institutionally underdeveloped, compared to the leading global counterparts, it is struggling from volatility, stirred by extremely speculative trading. This fundamental problem can't be cured overnight by qualitative regulatory shifts; instead, it requires continuous gradual changes that might foster a new generation of investors that are aware of, for example, buy-and-hold strategies.

The situation around China's stock market is not the traders' 'fault' only: there are a bunch of low-quality listings, and the number could be even higher if the state bodies in charge loosened regulations, such as listing standards, stock maintenance rules and requirements. Resulting from this, tech firms tend to list their stocks outside of China's mainland, choosing either Hong Kong or one of the New York bourses (plus, a couple of security companies have gone public on the London Stock Exchange). 

These are obstacles in the way of the financial system's opening-up and internationalization. The launch of the Star Market was one of the key steps supposed to surmount them. This year, we have seen a number of events moving the Chinese investment ecosystem forward to the global standards of adoption that might eventually lure local tech startups to go public domestically, as well as attract foreign capital to swoop into the country's nascent public equity scene.

Here we put four short narratives that have directly affected the international status of China's capital market and the development of the new sci-tech board as a global trading platform. While there are many more things happening around the current financial reform implementation, we discuss the most significant bellwethers.

Going global – through market indices

International investment research organization and one of the world's biggest stock market indices providers, MSCI (MSCI:NYSE), announced that the Star Market-listed companies will be included in the firm's indices, such as MSCI China and MSCI China All Shares. 

MSCI, formerly Morgan Stanley Capital International, is a global investment decision support tools provider. Founded in 1998 and based in New York, it is among the most prominent market index makers and maintainers planetwide. Recently, the company has been operating on high margins, with its core business growing over time; according to the annual financial results, the operating revenues climbed up by 12.5% in 2018, while recurring subscription revenues increased by 9.6% and asset-based fees grew by another 21.9% in the same year.

MSCI has previously expressed its interest in the new SSE project and the stocks listed in the sci-tech venue. It issued a standard announcement on July 19, three days before the first batch of companies kicked off trading on the fresh tech board in Shanghai. In this statement, the index compiler made it clear that MSCI is "aware of the upcoming launch of the Sci-Tech Innovation Board on the Shanghai Stock Exchange" and "is currently assessing its eligibility in the MSCI Global Investable Market Indexes."

By increasing asset liquidity on a global scale, this move might propel the comprehensive reform of China's capital markets – which is a priority these days. Higher market participation, coming with an influx of capital from diverse sources, is likely to positively affect one of the most challenging issues for the country's economic growth – the extreme volatility of its stock markets.

Attracting foreign money

Capital is undoubtedly the main factor in growth acceleration; the more diverse sources of financing a firm has, the higher its odds of growing into something better than a mediocre startup. The logic is quite similar for public companies – a variety of investors often means a variety of portfolios and trading strategies that, in turn, are likely to smoothen volatility in the long-term. China started a campaign to attract foreign money managers a while ago. Now, it is making one more step to the proposed next phase of 'openness.'

The State Administration of Foreign Exchange (SAFE) announced the cancellation of the investment quota restrictions for 'Qualified Foreign Institutional Investors' (QFII) and 'Renminbi Qualified Foreign Institutional Investors' (RQFII) in September 2019.

These schemes were created to permit non-Chinese institutional investors who met certain qualifications to invest in the country's capital markets. Approved by the State Council, the reform is meant to abolish the investment quota limitations "in order to implement the major policy decisions of the Communist Party of China Central Committee on promoting the new pattern of comprehensive opening up and further expand the opening up of China's financial markets."

As SAFE has reported, over 400 institutional investors from more than 30 countries have allocated capital in China's secondary market since the QFII (2002) and RQFII (2011) schemes began. However, the existing programs haven't so far gone viral among the major global asset management firms. Earlier this year, Bloomberg reported that foreign investors had used less than 40% of the quota available by the end of August 2019.

This removal can be thereby considered as 'just another symbolic change.' This might be true for RQFII only though: QFII quotas were fully allocated as of October 2019, according to the State Administration of Foreign Exchange.

The reform is likely to shape the nature of trading on it in the not-so-distant future. The high concentration of technology-driven companies attracts both global capital and money managers. Besides, the yuan's internationalization is the next story to be retold after this adjustment.

Bringing back home the greatest listings

An answer to ADR, Chinese Depositary Receipts (CDR) are likely to become a working mechanism for foreign firms willing to raise money at sky-high valuations in exchange for things like the flexibility of financing and the liquidity for backers to sell their shares in circumvention of currency control (this is why most of the largest tech unicorns will be still choosing Nasdaq). The country announced the CDR project in 2018. That was the first significant attempt to allow overseas-listed Chinese tech companies to allocated stocks domestically as well.

Talking about CDR-based IPOs in the Star Market, so far the Cayman Islands-registered chipmaker China Resources Microelectronics (CRM) and Segway-Ninebot (A19108:SH), a self-balancing scooter manufacturer, are the only enterprises that have chosen this option. The former is currently at the last stage of the listing process, while the latter saw its application status change to "accepted" in August, indicating launch of the vetting procedure.

Founded in 2014, Ninebot is a Beijing-based micromobility tool producer. In April 2015 the company acquired its American nemesis Segway, while raising USD 80 million from a handful of world-renowned investors including its client Xiaomi (1810:HK), Sequoia Capital and Shunwei Capital (顺为资本).

The firm filed for an IPO in the tech venue on April 17, intending to raise over CNY 2 billion (USD 283.93 million) to expand its business scale. As mentioned in the company's prospectus, ICBC (Industrial and Commercial Bank of China, 1398:HK) will buy over 7 million A shares from the firm, selling Chinese Depository Receipts (CDR) at a ratio of 10:1 on the Shanghai bourse.

Segway-Ninebot is probably the most 'new economy'-related company among all the applicants. It is widely known for a large downstream client base that includes shared mobility giants such as Bird, Lime, Lyft (LYFT:Nasdaq) and Uber (UBER:NYSE) and global retailers like Walmart (WMT:NYSE), Athena (ATHENA:CPH) and MediaMart.

A truism is that the availability of the CDR scheme is vital for both the board and the country's stock market – this is an absolutely critical component.

Involving other players

Not only companies but global financial entities that can act as underwriters, sponsors, advisors and so forth might also make a positive impact on the international status of China's capital market.

Swiss multinational investment bank UBS Group AG (UBS:NYSE) has become the first foreign underwriter, assisting biotech firm Haohai Biotech, which has already gone public on the Hong Kong trading platform, in its quest to list on the biggest bourse on the mainland.

At first glance, one non-Chinese entity helping a foreign listed Chinese (which many can consider a half-foreign) company is not a big deal at all. But, yes, this is another 'pilot' project that can make headway for global financial behemoths in the local public equity system.

No wonder that the word 'pilot' can be applied to the vast majority of all the latest initiatives – gradualism has been a pillar of China’s economic development over the past few decades.

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