epa05027713 A stock investor watches stock prices in front of an electronic screen showing the stock prices at a brokerage house in Beijing, China, 16 November 2015. Stocks across Asia were down Monday in the first day of trading after the Paris terrorist attacks which left about 130 people dead. The Shanghai composite index opened down at 3,522.46 and closed at 3606.96, rose 0.73 percent. The Shenzhen composite index opened down at 12,180.99 and closed at 12,620.38, rose 1.76 percent. EPA/WU HONG

Last year saw the highest number of Asian initial public offerings in two decades, reinforcing Asian companies’ status as the world’s largest users of public stock markets. So says the OECD’s latest Asia Equity Market Review.

Looked at through the lens of the primary market in equities, Asia is by far the most capital-hungry chunk of the world economy.

But with Donald Trump on the trade warpath, will this prove to be the high water mark for Asian capital raising in the current economic cycle?

Very likely, not least because of the depressed state of emerging markets this year. But the OECD’s numbers also confirm that Asia, and more particularly China, pose an important challenge to the US corporate sector.

Last year, 1,074 Asian companies were listed, accounting for 43 per cent of all public equity capital raised in the world. Some 470 of them were Chinese.

In fact, companies from China have been the largest users of IPOs worldwide over the past 10 years, exceeding the number of US issuers by 170 per cent.

Since 2008, Asian non-financial companies have raised $602bn through IPOs, which is almost half the capital raised by non-financials worldwide. This Asian dominance has coincided with a downward trend in IPOs in both the US and Europe over the period.

An especially marked contrast emerges with smaller, growth-oriented companies raising equity of less than $50m.

In the US, the number of such listings was highest between 1997 and 1999 during the dotcom boom, with a total of 384 IPOs. After 2000, that declined to an annual average of only 20 companies.

From 2013, the numbers for China increased to 220 transactions in 2017, which was almost five times larger than the annual average from 1997 to 2012.

A similar contrast is apparent in the technology sector share before and after the financial crisis.

China’s average technology share of its total IPOs from before the crisis (2000-2007) to the post-crisis period (2010-2017) rose 8 per cent. In the US, the technology share almost halved between the two periods.

This tends to confirm a view of the US technology sector as a thing apart. The likes of Apple, Google and Facebook do not have much in the way of physical assets. The value of these businesses lies more in human capital and monopolistic advantage. They are thus cash rich.

The decision to float was less about the need for capital than providing an exit for their venture capital backers; also to acquire a paper currency with which to reward themselves and their employees and to deploy in takeovers.

The lack of smaller IPOs is consistent with the Silicon Valley tech giants’ habit of buying up potential competitors before they reach the IPO stage.

This does not sound like a formula for continuing innovative dynamism and may be a factor in American poor productivity performance. Yet it would be unwise to assume that the greater use China makes of public markets necessarily points to a more vibrant corporate sector.

A significant proportion of primary and secondary issues in China relate to state-owned companies. The OECD authors drily remark that higher government ownership is associated with lower corporate performance in all markets where government is a relevant owner.

Foreign institutional investors have, nonetheless, absorbed shares on the partial privatisation of Chinese state-owned enterprises and are now bigger buyers of Asian shares than domestic institutions, which have low allocations to equities. The foreign buyers are thus colluding in a serious misallocation of capital.

The Trump administration’s trade war has already taken its toll on equity markets across Asia. The strong dollar has likewise done damage in those emerging markets where companies have accumulated large dollar borrowings.

A retreat from the globalisation of capital flows is already under way. Yet it seems unlikely that US and other developed world institutions will curtail portfolio flows into China.

Here the trend is for more globalisation. Since global index provider MSCI decided earlier this year to include 5 per cent of China’s mainland A shares in the index, China stocks, including Hong Kong listed H shares, have risen to 31 per cent of the index. So developed world institutions have actually been increasing exposure to China.

At the same time, Asian central banks have been de-globalising by reducing their dollar-denominated official reserves.

With the unpredictable Mr Trump attacking the Federal Reserve for raising interest rates, the independence of the US central bank can no longer be taken for granted. We are not yet at the point where the dollar’s role as the pre-eminent international currency is about to disappear.

As I have remarked here before, the alternatives are none too attractive. That said, the frictions between the US and China ensure that cross-border flows may diminish somewhat while market turbulence increases.


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