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A Financial Tsunami? The Next Great Market Opens Up

May 30, 2011 2:09 PM ET
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Jim Trippon, CPA, is the editor-in-chief of China Stock Digest (http://www.chinastockdigest.com/), America's #1 performing China investment newsletter as ranked by Dow Jones - Hulbert Financial Digest. All of the stocks covered by China Stock Digest (http://www.chinastockdigest.com/) may be purchased by US investors in US based retail brokerage accounts. A professional investment manager, Trippon has worked extensively inside China, and maintains a permanent team of financial analysts in Hong Kong, Shanghai, and Beijing. He leads an annual China Investors Fieldtrip each October and his new book Becoming Your Own China Stock Guru (http://www.amazon.com/Becoming-Your-China-Stock-Guru/dp/047022312X/ref=si3_rdr_bb_product) was recently released by John Wiley & Sons.
I've been waiting a long time for this day to come. Shanghai is about to step onto the global stage as the world's next great financial hub.

The turning point will be the creation of the so-called "International Board", and we're hearing that it's going to be launched very soon.

Shanghai's International Board will allow foreign firms to list themselves for trading in China. For the first time, the immense capital reserves of China's corporations, and its 1.3 billion people, will be allowed access to invest in western firms.

The list of companies on the shanghai Board will be small at first. But the potential impact could be enormous.

Among the first firms I expect to be traded through the International Board are General Electric, Procter & Gamble, Unilever, Royal Dutch Shell, HSBC, Standard Chartered, and Bank of East Asia. You can be sure that many more will follow.

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NYSE Euronext is working with the Chinese government and Shanghai's Stock Exchange to prepare for the launch of the city's International Board. I expect a formal announcement in a month or two, followed by a great deal of hoopla as trading is about to get rolling.

Billions in IPOs

Ten world-class companies will be first to list in Shanghai and they'll launch themselves with huge IPOs. Firms like the ones I mentioned above will list their shares only in yuan, making themselves accessible to large-scale investors and more than a billion Chinese individuals.

The reception these new listings receive will be a global financial event. As far as the Chinese authorities are concerned, it is a matter of prestige. Beijing is eager to see Shanghai take one more step towards becoming and international financial hub by 2020.

For Chinese investors it is a different story. Major companies like China Life Insurance have seen their investment portfolios rise and fall dramatically with the extremely volatile swings of the Shanghai Composite Index. You can be sure they'll be buying large lots of the blue-chip, dividend-paying western companies coming to market in Shanghai.

Foreign IPOs will be listed on the Shanghai International Board at or near parity to their current trading price on western markets. As China-watchers know all too well, the Shanghai Exchange sometimes takes on a casino-like fever. It will be very interesting to watch the reception these IPOs receive.

What will happen if they soar?

Will the Tail Wag the Dog?

Here's an intriguing question that will soon be answered. Will Shanghai prices drive the performance of these companies on western markets? Or will it be the other way around?

It is a fact of global timekeeping that Shanghai markets open many hours ahead of Europe and half-a-day ahead of New York. Big swings on the Shanghai Stock Exchange have had muted effects until now. But soon, Shanghai could set a tone for opening prices of major companies in New York, especially after earnings announcements.

It would be easy to diminish the importance of the Shanghai International Board by comparing it to stock markets in Tokyo and other parts of Asia. But Tokyo has been in a slump for more than a decade and China has already surpassed Japan in market cap. Other Asian exchanges are relatively small and usually don't have major effects on markets a world away.

A great number of important companies will qualify to list in Shanghai and they'll be eager for the opportunity. Prospective firms will need a market capitalization of at least 30 billion yuan ($4.6 billion). They must post a combined net profit above 3 billion yuan ($462 million) over three years. In the year before their IPO, companies should also achieve a net profit of more than 1 billion yuan ($154 million).

What's in it for companies being listed? Obviously they will have access to a previously untapped pool of capital – a huge pool. It is possible that the share values of established western firms will command a premium in Shanghai. That could result in upward pressure on the share prices of listed firms in western markets.

In other words, we investors could share in the wealth of a Shanghai IPO.

Companies that list in Shanghai could also have another important goal in mind. Dealing with Chinese regulators and receiving even-handed treatment has always been a challenge for foreign companies operating in China.

By listing in Shanghai, firms doing business in China automatically give the Chinese a stake in their success. The government, as well as various state-owned enterprises like China Life, and the country's citizens will all stand to prosper if these Shanghai-listed companies do well.

My bottom line: a Shanghai IPO could open a lot of doors for the next wave of investment pioneers in China.

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Global Profits Alert (GPA) is published by Trippon Financial Research, Inc. a financial media organization with offices in the United States, Hong Kong and Mainland China. GPA is written by Jim Trippon in conjunction with George Wolff, Sunny Wang, Todd Shriber, Kelley Damiani and J. Daryl Thompson.

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