Tips on investing in Chinese listings on the SGX
The Singapore Exchange (SGX) is currently actively pursuing Chinese listings, aiming to obtain not only Initial Public Offerings (IPO’s) but also cross-listings of entities that are already pre-listed on the Chinese stock markets.
This comes after a period of some uncertainty on the SGX, whereby Chinese companies started listing on our local bourse in the mid-2000’s, before our domestic regulators effectively blocked Chinese listings for several years, or at the very least made it a tedious and difficult process such that prospective companies decided to undergo public listing elsewhere.
Ultimately Chinese companies make up more than 130 of the nearly 800 listings that are on the SGX. However, many of these listings are indirect, through offshore holding companies, and are not listings in the Chinese corporations directly.
This is largely a result of some of those regulatory hurdles that we mentioned earlier regarding Chinese companies seeking a listing on the SGX.
Other methods to get exposure to the Chinese markets
In addition to mainland Chinese companies, there are also Hong Kong-based entities that are listed on the SGX. This is, however, a fairly limited number of offerings as the exchanges in Hong Kong and Singapore are big rivals in the region competing for the same pool of prospects.
Aside from equities, you could also consider Renminbi-denominated bonds as another alternative. These offer investors in the SGX the opportunity to invest in mainland Chinese companies without purchasing actual stock in the companies.
There is a fair amount of such fixed-income instruments found on the SGX, with more than 100 of them listed.
It does, however, come with the added exchange rate risk that exists on any payments being received in a foreign currency.
Risks with Chinese Listings
One of the main reasons regulators in Singapore resisted listings from mainland China over the past decade was due to the major losses suffered by investors on the SGX when some Chinese companies failed.
FerroChina had a market cap value of over S$2 billion in 2007 and cost some investors their entire investment outlay when they delisted a mere 3 years later.
Several other companies also cost investors significant sums when accounting irregularities were revealed, and often these companies claimed some sort of disaster had destroyed all their records so they couldn’t investigate the irregularities.
The relatively relaxed regulatory environment in China when it comes to management of company accounts is definitely a risk for investors looking to allocate a portion of their portfolios to a Chinese based company.
Those listed on the SGX now have to face additional regulatory hurdles to try and protect investors, but there still remains an element of corporate governance risk that is not typically faced when investing in a Singaporean company.
Any investor considering a Chinese investment should perform their own additional due diligence, looking at the underlying fundamentals of the company and considering if the company is independently audited by an accounting firm not based in China itself.
Frameworks do exist now whereby Chinese registrants on the SGX are required to meet all the regulatory requirements that exist in China and Singapore, so this should mitigate some of the risk faced with Chinese investments in the past.
Benefits of Investing in Chinese Listings
A key benefit of investing in mainland China-based listings is that an investor exposes part of their portfolio to the higher growth rate seen in that economy.
Even in the current environment where the Chinese economy has slowed, it is still growing far faster than most developed and mature economies.
Additionally, a Singapore-based investor can benefit from diversifying themselves out of the South East Asian region, where most local companies have most of their exposure.
This provides a degree of insulation against economic factors that impact South East Asia but may not impact the Chinese economy in the same way.
This geographic diversification of a portfolio is an important consideration for any investor, in addition to diversifying across industries.