Chinese firms are increasingly looking to Europe to raise funds, with mixed results. While stock listings of Chinese companies in London have performed well, those in Frankfurt and Warsaw have done poorly. Chinese bond and equity funds have received more positive response, initiating new types of exchange-traded funds this year. Changing regulations are gradually altering the requirements of foreign fundraising for Chinese firms.
Stock listings of Chinese companies in Frankfurt and Warsaw have struggled. Most recently, in an incredible gaff, Frankfurt-listed Chinese shoe-maker Ultrasonic announced that its CEO had absconded with $60 million from the company’s bank account, only to find out he had been on holiday. Shares of Ultrasonic declined in the wake of the blunder. Ultrasonic joins Kinghero and Youbisheng Green Paper in the ranks of questionable Chinese companies listed on the Frankfurt stock exchange. Chinese companies Peixin International Group NV and JJ Auto, trading on the Warsaw exchange, have traded at below their initial values. The perception of Chinese companies in Frankfurt and Warsaw at this point is not a positive one.
Chinese firms listed on the London stock exchange have fared better. Currently, there are seven Chinese companies on the main exchange and 54 on the AIM market for smaller companies, and the outlook continues to be positive.
Chinese bond and equity funds have also done well in Europe, as Europeans seek to diversify their risk exposure. A £140 million ($226 million) fund was listed in London in January of this year to allow retails investors to purchase mainland Chinese shares for the first time. Also in January, Deutsche Asset and Wealth Management and Harvest Global Investments Limited set up Europe’s first ETF tracking China’s CSI300 “A-shares” Index. A $320.9 million fund set up by the E Fund to track the MSCI China A-share Index was launched in May, trading on the Deutsche Börse, the London Stock Exchange, the NYSE Euronext Amsterdam, and the Borsa Italiana. Heptagon Capital joined Harvest Fund Management in selling an A-share based ETF in August.
Bank of China Hong Kong Asset Management has recently moved a $165 million high yield bond fund to Luxembourg from the Cayman Islands in the hopes of attracting European wholesale and retail investors. Citi will distribute the funds through its platforms. This move represents the first time that a Chinese state-owned bank will raise funds from European retail and pension fund investors.
China’s stance toward foreign fundraising is changing. First, changes to the Renminbi Qualified Institutional Investor (RQFII) regime in 2013 removed restrictions to the requirement for RQFIIs to hold at least 80 percent of their funds in the domestic fixed income market. This encouraged an increase in foreign funds entering the Chinese stock market. Second, China relaxed rules on overseas listings in December 2012, abolishing the threshold on net income and net asset holdings that had been in place since 1999. This regulatory change did not result in an immediate surge in listings of Chinese companies on European stock exchanges, but it does open the door to future public offerings. Third, the Shanghai Hong Kong Stock Connect will allow foreign investors to trade shares on the Shanghai stock exchange directly, raising foreign capital for Chinese companies on the mainland.
While the listing of Chinese companies promises to soar in the United States, growth in stock listings for Chinese firms in Europe remains relatively slow. Exchange-traded funds appear to be more desirable, as they spread risk across a diverse group of assets. New regulatory changes may improve the investment environment; for example, a new trading scheme between China and Europe will allow currencies to be traded directly. This may, over time, prompt an increase in European funding of Chinese firms. Such a relationship could well prove fruitful in the long run.