Recruiting in China

By Angela Pasceri, Financial Correspondent

HONG KONG (HedgeWorld.com) - The Shanghai and Shenzhen stock markets will once again draw attention, as China's financial reforms of the past two years are expected to provide the catalyst for a rapid expansion in market capitalization.

The value of China's stock market is expected to quadruple by 2010, according to a recent Credit Suisse report authored by Vincent Chan, with the dual listing of major Chinese H shares and red chips being the major driver.

If China's market capitalization-to-GDP ratio reaches 50% by 2010, the report noted that People's Republic of China capital markets would reach a value of $1.88 trillion, compared with $402 billion at the end of 2005. If China's more successful offshore- listed companies sought a dual-listing on the A-share market, and share prices were valued at 10 times 2005 earnings, the capitalization of the mainland stock market would rise to $2.6 trillion in 2010.

The regulatory reforms, which were taken up at a pace far quicker than the market predicted, and the recovery of mainland share prices, will give Hong Kong a run for its money in attracting mainland listings. Hong Kong found its niche as the key destination for China listings over a period stretching from 2001 to 2005. That was when China restricted fundraising activities on the mainland as it launched its reform of listed companies. During this time, mainland companies raised $149 billion in Hong Kong versus $48 billion in China.

Along with the China Securities Regulatory Commission's push in 2005 to push through non-tradable share reform, where listed companies converted non-tradable shares into tradable stock, other regulations were implemented to create market supports. This bodes well for Chinese companies, which are increasingly considering dual listings.

There are 53 Chinese companies with a total market capitalization over $3 billion listed in domestic and overseas markets. The top three companies by market capitalization are PetroChina, China Mobile and Bank of China. Within the broader group, 29 stocks are listed only overseas, and not accessible to domestic Chinese investors under the current capital account control framework in China. "There is a good chance that almost all of these 29 companies would seek a dual listing in the domestic China market within the next five years," according to the report.

The total market capitalization of these 29 companies, based on current valuations, is $731 billion, which is greater than the current aggregate market cap of the Shanghai and Shenzhen stock exchanges.

What would drive activity on the Chinese stock market even more, said to Aaron Boesky, chief executive of Hong Kong's Marco Polo Investments Ltd., are the Olympics.