Exchange sets out its stall in Beijing

In only its second road show event overseas, London Bourse insists it still has the edge over rivals

Top officials from the London Stock Exchange were in Beijing recently to present their case to Chinese investors of the benefits of listing there, rather than in New York or elsewhere in Europe.

It was the first time the 213-year-old exchange has held such an event in the Chinese capital.

The visit by chief executive Alexander Justham and his team came just three weeks after New York hosted the largest IPO in history of Chinese ecommerce giant Alibaba.

Sixty Chinese companies are listed on UK exchanges, compared with just over 70 trading on the main New York Stock Exchange, with many more on its lesser, tech-dominated Nasdaq exchange.

New York-listed companies include some major Chinese names such as Baidu and Sina - the Internet portals - and now Alibaba, which raised $25 after listing at $68 on Sept 19.

A strong component of Justham's sales pitch in Beijing was London's position already as a growing platform for selling renminbi-denominated bonds, as well as the city's strong global investor base, which has, he says, remained largely unaffected by any fluctuations in the UK economy.

While acknowledging that many major Chinese technology companies have favored a New York listing, Justham insisted there remains just as much Chinese investor interest in London as a potential market.

He concedes that his exchange may not have marketed itself as widely abroad as its rival across the pond, which has hosted numerous international promotional events in recent years.

LSE hosted its first ever road show in Hong Kong in June, which Justham says attracted a lot of interest and provided him with great confidence before the Beijing event.

He maintains there is still strong investor enthusiasm for Chinese stock flotations in London, and a listing there, even for tech companies, does not represent any greater a risk, as some analysts have suggested.

"We operate a robust, transparent marketplace, underpinned by a strong regulatory framework, but risk cannot be eradicated to zero," he says.

"There are a lot of Chinese companies in the UK, and they have been prepared to look at the positives as well as the negatives.

"There are all sorts of risks, (involved in an IPO) and the financial community here understands that and can price those accordingly, for companies from all around the world."

Many in London were reportedly still disappointed that Alibaba founder Jack Ma chose to list in New York. However, the flamboyant chief executive was notably absent, when his team presented the company's IPO offering to investors in the British capital, as it had in various other cities including Singapore and Hong Kong.

While refusing to comment on Alibaba, Justham says he feels London investor appetite for Chinese stocks is growing, as an LSE-listing offers investors an ideal opportunity to buy into the growth story of China itself.

Seven Chinese companies are listed on the main London exchange, within that total of 60 listed in the UK, but the total has grown little over the past couple of years.

The major factor suggested by analysts for the investor apathy is regulatory trust of Chinese companies.

A series of cases involving Chinese corporate accounting irregularities have hit the headlines, resulting in companies delisting from stock exchanges, especially in the United States.

Sino-Forest, a Chinese forestry group listed in Toronto, for instance, saw its shares plunge by 90 percent in 2011 after Muddy Waters, a research firm founded by short-seller Carson Block, accused the company of overstating its sales and the value of its forest land.

The move wiped almost $500 million from the value of the company, which is owned by a $37 billion hedge fund run by billionaire John Paulson.

Longtop, a Chinese software company, was also delisted from Nasdaq in August that year after its auditor, Deloitte, accused it of "very serious defects", including faking its bank statements.

Those two were among 29 Chinese companies delisted from US bourses, with a combined paper loss of $5.7 billion. Another 48 companies had trading in their shares suspended, or received suspension warnings from the US Securities and Exchange Commission.

Four years earlier, on London's Alternative Investment Market, Chinese lottery operator Betex delisted after Chinese authorities detained two senior staff members for illegal gambling.

And in 2008 the chief executive and majority shareholder of Chinese mobile phone handset maker ZTC Telecoms disappeared after using shares in the company as collateral for a loan.

But Justham insists those two examples should not deter investor confidence in Chinese stocks.

A major selling point for Chinese companies to choose London as a flotation platform is its growing reputation as an RMB trading center.

Last month Britain became the first Western country to issue an offshore renminbi-denominated bond.

The UK Chancellor of the Exchequer George Osborne says the move was aimed at deepening efforts to build financial links with the world's No 2 economy.

News of the bond came after Britain announced 2.4 billion pounds ($3.9 billion) of commercial deals with China, coinciding with Chinese Vice-Premier Ma Kai's visit to London.

The Chinese currency is currently not convertible, but Beijing has been liberalizing its capital account restrictions in recent years.

The Chinese government is now encouraging international use of the renminbi, and growing numbers of renminbi products are already being created in offshore centers, with London seen as a key location in Europe.

The creation of renminbi-based products has provided more choice for investors, and will encourage more offshore renminbi liquidity in the future, says Justham.

Other key attractions of the London Stock Exchange to Chinese investors, he says, are London's time zone, its diverse investor base, and the market's sound legal structure, all of which count strongly in its favor in growing its offshore renminbi activities.

Twenty renminbi-listed bonds are sold in London, and they have raised a total of 15 billion yuan ($2.4 billion).

Issuers include the Bank of China, European Bank for Reconstruction and Development, Lloyds Bank, HSBC and International Finance Corporation.

"There is now a broader capital financial flow coming out of China," Justham says. "The renminbi is becoming a global currency in fixed income markets and more of those natural flows will come to London."

"In a way, the more renminbi that is managed here, the more likely it will create its own financial ecosystem in the UK. "London is the natural place to become the non-China renminbi center, more than anywhere else," Justham says.

The diversity of the city's global investor base will allow London to sustain its competitive advantage as a global financial center, long term, he says.

"We are a major international financial center, which is much bigger than just the UK domestic economy. We serve the real economy of the world."

Alei Duan, managing director of financial advisory firm Abridge Capital, says one issue needing urgent action, is how LSE operates in China.

Its only direct China subsidiary is in Hong Kong, he says, which looks after an additional subsidiary in the Chinese mainland.

Duan suggests it would be more efficient if the China subsidiary could report directly to its London headquarters, rather than to the Hong Kong subsidiary.

"The Chinese mainland is where the market is, so if this subsidiary can be given a budget directly and be charged with more decision-making power and responsibility, its marketing activities would be more efficient."

He also points out that individual Chinese stock traders find it difficult to buy and sell London-listed Chinese stocks, as they need to go through a complicated process of finding a broker and then completing what can be a complex and costly checking procedure.

In contrast, the US stock exchanges allow individual Chinese stock traders to buy and sell shares, he says.

"Another common problem for Chinese companies listed in London is that they are not being traded much, so liquidity for trading is low.

"If Chinese stock traders could use LSE's platform, then liquidity for Chinese stocks would grow, and more Chinese companies would want to list on LSE."

Chinese companies listed in London are only traded by institutional investors, with UK retail investors more likely to buy shares in familiar UK companies.

"Chinese traders are more likely to trade Chinese companies because they are familiar with these companies, so this could help a lot of AIM-listed Chinese stocks," Duan says.

Matt Butlin, head of research at Allenby, an AIM-nominated adviser and broker, added that the low investor appetite for Chinese stock is still a direct result of the series of delistings on Nasdaq.

"Several London-listed Chinese companies have also had major operational issues or cut their dividend payments," says Butlin, naming Naibu and Asian Citrus as examples.

The latest dose of bad publicity for Chinese-listed companies came this month, when it emerged that the missing chief executive of embattled German-listed Chinese shoemaker Ultrasonic had resurfaced in China to deny accusations he has absconded with millions of dollars of company money, telling local media he had been traveling and lost his phone.

His comments appeared to contradict Ultrasonic's supervisory board, which dismissed him, claiming he and his son had drawn down a $60 million credit facility in August and transferred money from Hong Kong before disappearing.

cecily.liu@chinadaily.com.cn