Threat from the west
The near-term outlook for the Shanghai and Shenzhen equity markets is certainly not helped by the fact that the best and brightest corporate issuers usually chose to head west and list directly in Hong Kong or New York. Davin Mackenzie, managing director of Peak Capital, a Beijing-based private-equity firm, says the best investment prospects in China – if they can be identified – have the same characteristics: transparent accounts that show a record of compliance with tax laws, constant improvements in their core businesses rather than over-diversifying, and management teams that include senior executives who have been educated abroad and spent significant time there. “These types of good investment targets are often already listed overseas, allowing them to ‘step outside of the inherent restraints of doing business in China,’” says Mackenzie.
In other words, quality corporates are usually not listed on the domestic equity market but on foreign exchanges. And the aggressive expansion drive for the lucrative business of new listings by exchanges, such as Nasdaq and the New York Stock Exchange, is certainly exacerbating the talent drain from China’s exchanges. In a speech before making a prospecting trip to Asia in December, NYSE chief executive John Thain made it clear that he was looking to attract more new listings from the rapidly growing Chinese economy.