2024 RT Amination Banner.gif

China Daily

News> Business> Content
Monday, April 19, 2021, 12:08
Stars align for new wave of flourishing stock sales in Asia
By ​Paras Anand
Monday, April 19, 2021, 12:08 By ​Paras Anand

An investor checks stock prices at a brokerage in Shenyang, capital of Liaoning province. (PHOTO / CHINA DAILY)

Growth opportunities in China and other Asian economies are set to propel a long-term boom in equity markets over the coming years, as the region draws in ever greater flows from global investors starved of returns and structurally underweight Asia.

For decades, stock exchanges in the United States have been taking center stage in global equity offerings, thanks largely to the greenback hegemony and the strong economic leadership of the US.

But a potential paradigm shift is brewing, with global funds gravitating toward Asian issuers, including Chinese ones, that promise greater growth potentials. The world's largest initial public offering so far this year has landed in Hong Kong.

The stars look aligned for a new wave of flourishing stock sales in Asia, where economic recovery, listing reforms, technological innovation and currency appreciation are combining to drive an equity capital boom.

Stock markets of Asian countries appear significantly underdeveloped relative to the size of their economies, implying huge potential for growth.

For instance, the aggregate market capitalization-to-GDP ratio is about 89 percent for the Chinese mainland and Hong Kong as a whole and 116 percent for India, far below 221 percent in the US and 136 percent in the United Kingdom

For instance, the aggregate market capitalization-to-GDP ratio is about 89 percent for the Chinese mainland and Hong Kong as a whole and 116 percent for India, far below 221 percent in the US and 136 percent in the United Kingdom.

With a "first in, first out" advantage, China is leading a global economic recovery from the COVID-19 crisis, as domestic consumption rebounds and exports increase amid supply disruptions in Western countries.

China pulled off a 2.3 percent GDP expansion last year, the only growth among major economies worldwide. Other Asian economies, including Vietnam, also bucked the global growth downturn to report 2020 expansion.

In an era of zero to negative interest rates, especially in the West, international funds could find few better places than emerging Asia for decent returns.

Growth in China, India and the bloc of the Association of Southeast Asian Nations, or ASEAN, will continue to outpace Western countries over the next few years, according to International Monetary Fund estimates. The IMF forecasts that the Chinese economy will expand by 8.4 percent this year, while India will likely achieve a 12.5 percent growth.

READ MORE: European markets down, Asia gains ahead of US-China talks

China's market reforms

Keen to invigorate their capital markets, Asian policymakers have been busy rolling out reforms toward smoother listing and trading.

A new venue for technology startups, known as the STAR Market, opened in Shanghai with a bang in 2019, featuring fewer trading curbs and lower profit thresholds for issuers than China's other onshore listing venues.

To encourage technology listings, regulators have also eased IPO approval rules for the innovative enterprise-heavy ChiNext in Shenzhen.

A spike in market volatility in the first quarter of the year did little to slow listing approvals. The ChiNext index plunged more than 20 percent from its February high in less than three weeks, amid speculation that the Chinese central bank may soon start to tighten liquidity, while STAR stocks suffered similar routs after peaking in January.

Historically, such magnitude and velocity of declines would often prompt Chinese regulators to limit the pace of new issuance in the onshore market. However, China's onshore IPO machine kept running at full steam this year, shrugging off volatility concerns and churning out 100 deals in the busiest first quarter since 2017. That compared with 51 and 31 listings in the first three months of last year and 2019, respectively.

In a sign of strong policy support for tech firms, about two-thirds of the onshore initial share sales this year have taken place on the ChiNext and the STAR Market.

Hong Kong has also attracted a stream of biotech IPOs over the last three years, after its exchange operator relaxed restrictions in 2018 to allow pre-profit and even pre-revenue issuers in the sector.

Hong Kong has also attracted a stream of biotech IPOs over the last three years, after its exchange operator relaxed restrictions in 2018 to allow pre-profit and even pre-revenue issuers in the sector

Meanwhile, India is planning bold reforms that could spur a capital market boom over the next few years. In a bid to boost efficiency, the government aims to privatize State-owned giants from banks to transport operators. Similarly, Pakistan is considering privatizing State-run companies across a wide range of sectors.

In Southeast Asia, Singapore is considering allowing the listing of special purpose acquisition companies (SPACs), three years after introducing dual-class share structures to lure tech IPOs.

Indonesian regulators are also reviewing dual-class structures, which are popular among internet firms.

ALSO READ: Asia's markets are red hot and the money just keeps pouring in

Critical mass

At the current rate of transformation, we expect Asia will gather a critical mass of market infrastructure to be on a par with US exchanges in the next five to 10 years.

On a deal flow basis, the burgeoning Chinese capital market is already closing in on US bourses. Global deals are increasingly gravitating toward two centers: longstanding US venues and young but vibrant Chinese bourses.

Last year, IPO proceeds totaled US$119 billion across bourses in Shanghai, Shenzhen and Hong Kong, compared to $181 billion raised in the US. Though still lagging on fundraising value, they recorded 537 listings in the same period in total, exceeding a deal count of 509 in the US.

China is progressively opening its financial markets to foreign investors, who have been piling into the country's onshore bonds and equities in recent quarters.

Inflows are set to continue, as robust economic growth and a strong renminbi persuade more funds to boost their allocation to Chinese assets.

Index compilers like MSCI and FTSE have in recent years been increasing the weighting of Chinese stocks in global equity benchmarks, further raising their appeal.

More recently, trade tensions between Beijing and Washington have been a double-edged sword for Asia's equity capital market.

On the one hand, geopolitical risks have spurred a flurry of Chinese tech firms quitting US exchanges and returning to Asia. The Eastward migration of Chinese listings will likely continue.

On the other hand, Chinese issuers have come under scrutiny after Washington barred US investors from owning shares in a number of China-based firms. This has introduced greater near-term uncertainty.

Another medium-term challenge facing Asia's IPO markets may be rules that could limit investor confidence. For instance, regulatory control over IPO pricing has been a concern among issuers and investors in China's onshore market.

We think this and other issues should be best addressed in future rounds of listing reform, encouraged by some liberalizations being piloted in areas like Shanghai's STAR Market.

However, these issues of geopolitical friction and market development need to be considered in the broader context that Western economies are facing huge pension funding gaps.

Asia may still be a long way off becoming the world's dominant listing hub, but we see its rising trajectory as clear and irreversible. However, the headlines portray the headwinds, global capital will be funding Asia's growth over the next decade.

Paras Anand is chief investment officer for Asia-Pacific at Fidelity International, a global asset manager.

The views don't necessarily reflect those of China Daily.

Share this story

CHINA DAILY
HONG KONG NEWS
OPEN
Please click in the upper right corner to open it in your browser !