Will China Play Nice with U.S Exchanges?

Yesterday, I caught up with Doug Chu, a former investment banker turned head of the NYSE’s Silicon Valley office. It was a candid discussion that touched on a number of interesting data points, not all of them encouraging for the NYSE.

1.) Unsurprisingly, Chu agreed with Bill Gurley about there being a disconnect between what’s happening in Silicon Valley and elsewhere on the IPO front. In his widely read blog post of earlier this week, Gurley observed that the Valley has come to believe there’s a dearth of IPOs in part because many companies going public are based elsewhere in the country. Chu suggests Gurley should have included China in the conversation. There’ve been 122 IPOs in the U.S. this year, and 25 have been China-based companies listing in the U.S. – a huge percentage. (For what it’s worth, nine of those 25 have either been clean tech or information tech companies and the rest are consumer companies.)

2.) Chu said the trend right now for the NYSE is positive. More China-based companies are listing in the U.S. later this year, and he expects next year to be strong as well, largely because China’s investor base is still comprised of retail investors; the companies are coming here until that market matures and consolidates to avoid volatility.

3.) Several of the China-based companies to list on the NYSE probably couldn’t have gone public were they U.S. companies with the same businesses, including solar PV-related companies. In China, those companies can legitimately show 30 percent year over year growth; here, many are seen at this point as me-too companies.

4.) While the number of China-based companies listing here is growing, the number of companies going public in China is growing even more quickly, including on the Hong Kong, Shanghai and Shenzhen exchanges. Similarly, while most of the “capital formation” is happening in the U.S., Chu suggests that China will take the lead at some point, maybe not so long from now.

5.) Given China’s explosive growth, the NYSE and everyone else who sees the writing on the wall is spending a lot of time there. As soon as “five to 10 years from now, China will have coalesced into an institutional market that will be a major competitor to New York and London,” says Chu.

6.) A couple of years ago, the NYSE bought the global exchange Euronext. But however much it might like to buy a Chinese exchange, that’s not happening, says Chu. The Chinese government would never allow it. So what happens when Chinese companies no longer have reason to list in the U.S.? It’s a question to which no one really knows the answer, though Chu says the NYSE is hoping it might partner with the country’s exchanges via a fast-growing piece of NYSE’s business: an advanced trading exchange that it spent $500 million to build and that involves data centers, middleware, software, services — everything required to run a massive global exchange.  The Tokyo stock exchange already buys the technology, as does the National Exchange of India, and the Qater Exchange in the Middle East.

7.) The NYSE is also counting on a little quid pro quo going forward. “If we get to a point where we could enable U.S. companies to [list] half their stock in China, that will be a help for us. If I’m China, I want to have [ADRs of] Coca-Cola list on the Shanghai stock exchange.” Chu said the NYSE, which itself went public in 2006, might even list some shares on a Chinese exchange.

8.) So has the Chinese government indicated that they want help from the NYSE? Chu calls the discussions ongoing, adding, “Right now, we’re the most advanced capital market in the world – the deepest, savviest, and most sophisticated. But it’s not a given that that’ll remain the case forever. It’s a big advantage for the US and our economy, right now, but we can’t assume anything, so we’re definitely not taking our eye off the ball.”