Will Latin American Companies IPO in Shanghai?

by: Erik Bethel

China just announced that foreign companies will be permitted to list on the Shanghai Stock Exchange as early as next year. This is a part of a major effort to promote Shanghai as an Asian financial hub. While it still has a long way to go, Shanghai sees itself in direct competition with Hong Kong.

Shanghai's deputy mayor Tu Guangshao made the announcement yesterday. And while rumors of foreign companies being able to list in Shanghai have floated around for the last year or so, this marks the first time that any public official has put a timeline on when this could happen. The Shanghai stock market (SSE) has launched a new English website which posted the revised listing plan.

HSBC (HBC) hopes to be among the first foreign companies to list in China. But we at SinoLatin capital are interested in the implications for Latin American companies, particularly those in natural resources where there is a tangible link to China. A Shanghai stock exchange listing could help Latin companies tap into China's enormous pool of liquidity (analysts estimate that China has over US$4 trillion in savings). Stocks would also be listed in the Chinese RMB which could be a huge benefit to Latin companies fearing a dollar devaluation.

The move will also help China soak up the excess liquidity in the domestic market. Right now, because Chinese citizens are prohibited from investing abroad, any material increase in wealth creates bubbles (mainly in real estate and the stock market). As a case in point, the SSE index is the world's best performing market, rising 90% year to date. Why is this happening amidst the global financial crisis? Mainly because Beijing raised lending quotas and Chinese banks unleashed an avalanche of money into the system (for more information see my previous posting).

Which Latin companies do we see listing in Shanghai in the future?

(a) Those that already have a link to China like Mexico's Grupo Bimbo (OTCPK:GRBMF) which has made a few acquisitions in Chinese bread companies, or Mexico's Gruma (GMK) which produces tortillas/wraps for all of the KFC's in China),
(b) natural resource firms (such as Brazilian iron ore giant VALE, Petrobras (NYSE:PZE)), and
(c) large financial institutions (Bradesco (NYSE:BBD), Itau (NYSE:ITUB)).

We're still pretty early on this, but I'll keep you informed as things develop.

Disclosure: the author has no positions in any of these stocks.