China’s impact on global capital markets

September 04, 2018

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by Ross Hunter Partner, Capital Markets

Email +44 (0) 7802 918 885

by Katya Kuznetsova Director, Capital Markets

Email +44 (0) 7788 624899

When the news about Apple reaching a US$ 1 trillion valuation was released, a number of commentators pointed out that the first company that reached that milestone was in fact PetroChina in 2007 (although its valuation was not considered as reliable, given a small free float).  While the rise of Chinese companies did not proceed at the time as originally expected, we seem to be seeing a return of strong China growth trends at present.

In the year to 31 March 2018, Greater China contributed over 44% of global growth in the market capitalisation of the Global Top 100 public companies, with a notable landmark reached this year - the entry of two Chinese companies into the Global Top Ten (and one more edging closer at number 11). 15 companies from Greater China are now in the Global Top 100 – versus 12 last year, with an overall increase in market cap of over 50%. The two new entrants into the Top 10, Tencent and Alibaba, were second and third highest absolute performers overall, only surpassed by Amazon.  

Back in 2010 Goldman Sachs predicted that over the following 20 years, the market cap of companies listed on stock exchanges in emerging markets would be expected to rise from 31% to 55% of the total global market cap, with the shift driven by higher GDP growth and deeper capital capacity in those markets. Goldman Sachs further predicted that the market cap of Chinese companies would outstrip the US by 2030. Although this prediction may have been in doubt at some point a couple of years ago, more recent developments suggest a strong return of China as they move closer to becoming the leading global economic power. China’s global GDP contribution amounted to 15% in 2017 against US’s 25% - this compares to 4% vs 40%, respectively, in the 1960s.

We have been witnessing a comeback of strong performance of Asian markets in general and Chinese stocks in particular. Asia Pacific stock market indices (including Chinese companies listed on overseas exchanges) have been outperforming the global and US indices over the past 12-18 months. In addition to strong equity market performance of Chinese companies, China has been generating high volumes of IPO activity. According to the PwC Greater China IPO Watch, in 2017 there were 631 IPOs in Greater China, the highest number since 2004, which raised a very respectable total of US$52.1 billion in IPO proceeds.

China is catching up with the US as a host to some of the world’s largest internet companies. Currently, China is home to nine of the world’s 20 largest internet companies by market cap while the US has 11. Five years ago, China had two and the US had nine.  

Use of technology is a critical driver in the growth of the world’s economies and China is now increasingly seen as a cutting-edge designer and developer of advanced technologies. The Chinese giants are largely growing off the back of domestic demand at present. Tencent and Alibaba get more than 90 percent of their traffic from within their home country, compared with roughly 10 percent for Google and Facebook, but they all have plans to expand. While techno-protectionism and the threat of trade wars may temper these plans in the short run, the longer term macroeconomic potential is clear.  

Technology will remain the most important sector to watch this year and into 2019, as Chinese companies eye the global capital markets. The enthusiasm of investors for ‘new economy’ IPOs is set to continue, reflecting the market’s confidence in China’s increasing orientation towards innovation and leading edge technology, although in the short term, US investors may be somewhat wary of the trade war threats.

There is also a growing pipeline of Chinese tech giants’ spin-offs. These companies have created their own ecosystems, and have backed or become influential investors in a number of related businesses and promising startups. Tencent in particular could benefit with potential IPOs of Kuaishou, Maoyan, Nio and Bilibili – building on its success last year, which saw China Literature, Tencent’s e-book spin off, and Yixin, the online car retailer, in the top three IPOs in Hong Kong in 2017. Other IPOs include the expected spin offs of Ping An Insurance and JD.com.

Keep an eye out for our next blog, where we look at the ever-intensifying stock exchange efforts to attract new technology giants.

by Ross Hunter Partner, Capital Markets

Email +44 (0) 7802 918 885

by Katya Kuznetsova Director, Capital Markets

Email +44 (0) 7788 624899