Here Comes "Capitalist" China

China intends to open trading on the Shanghai stock exchange to foreign investors next month. This is big news for brokerages, hedge funds, traders and individual investors who had previously been largely excluded from China’s securities markets.  This change will serve to allow foreign investors to directly buy and sell stocks listed on the Shanghai exchange, which has not been allowed to date.  The change will also allow Chinese investors to trade in stocks listed in Hong Kong.

While there has been limited and indirect trading in Chinese stocks by foreign investors, this is a clear effort by China to integrate its economy into the international arena, and to allow the global market to more efficiently value companies based in China by listing them through the proposed Shanghai-Hong Kong Connect program.

The starting date has not yet been publicly announced, but mock trading sessions already keep Hong Kong brokerage employees working overtime. The program will still contain certain quotas and other limitations, including caps on two-way trading volume and certain account equity values for individual trading accounts of mainland Chinese investors. Foreign investors won’t be allowed to buy and then sell on the same day, and it remains unclear as to whether or not margin trading or short-selling will be initially permitted.  An added risk to the trading will be that trades will only be settled in renminbi, China’s official currency. There is also no clarity on whether the trading profits will be subject to China’s capital gains taxes.

This new program is a harbinger of things to come as a clearer view of “Capitalist” China develops and China seeks to grow as a major player in the world economy. As big a deal as this program is, for China to move into a leadership position in private capitalization of businesses, China will need to improve its securities regulatory enforcement environment, akin to our SEC, and the even bigger challenge of providing better remedies through the courts so that company insiders are less able to rook shareholders and investors through current fraudulent transactions that too often go unpunished because of a structural lack of courts, cases and remedial history that only serve to encourage corrupt corporate activities, which heighten the risks of investing in mainland China companies.

If you have any questions about the changes coming to the Shanghai stock exchange or would like to discuss how it may impact your business, please contact me or the Scarinci Hollenbeck attorney with whom you work. 

Take a look at some of our previous posts regarding international business:

• Protecting Intellectual Property on the Global Stage
• Spotlight on Mergers and Acquisitions: Are Global Takeovers Headed for a Slump?
• International Intellectual Property Filings Not Slowed by Shaky Economic Recovery