Jun. 28 – Mumbai may be on the way to overtaking Shanghai as a financial hub in the coming years based on data which shows that the Bombay Stock Exchange’s main index significantly outperformed the Shanghai Stock Exchange’s main index in terms of growth in the past decade.
The Bombay Stock Exchange (BSE) traces its roots back to 1830, with its primary trading index, the Sensex, being first compiled in 1986 with a base level of 100. The BSE is now the largest exchange in South Asia and the 12th largest globally with an estimated market capitalization of US$1.26 trillion in December 2012. There are over 5,000 listed companies on the exchange.
In contrast, the Shanghai Stock Exchange (SSE) was only reformed in 1990 and lists some 900 companies. It is the sixth largest exchange in the world with a market capitalization of US$2.5 trillion, but is dominated by government-owned companies and is not fully open to foreign investors. Shanghai’s primary index, the SSE Composite IX was formed in 1991 with a base value of 100.
The BSE Sensex grew by 405 percent over the last 10 years (June 2003-June 2013), while the SSE Composite Index managed only a 37 percent growth rate during that same time.
This is more remarkable given the Shanghai market has the advantage of a fixed population access: Chinese nationals can only invest in the Shanghai or Shenzhen exchanges and require special permission to acquire stocks from overseas. Indians meanwhile are free to invest where they choose.
The Shanghai Stock Exchange places limitations on foreign investment with only 170 foreign institutions currently able to buy and sell A-shares under the Qualified Foreign Institutional Investors program. Speculations on bubbles are rampant when it comes to China’s indexes, which is a feature that India’s exchange does not tend to have. Furthermore, government interference in the Mumbai market is far more limited.
There is also a difference in funding – 90 percent of available bank funding in China goes to state-owned enterprises, while in India that 90 percent goes to privately held businesses. It makes it far harder for Chinese companies to compete at an executive level with their Indian counterparts, even with the benefit of state funding and involvement. Simply put, Indian businessmen are more capable than Chinese businessmen in making money, and being able to share that through dividends.
Strict regulations inhibit the flow of Initial Public Offerings (IPO) on the SSE, with a current backlog of some 800 companies waiting to list publicly. Shanghai issued only 26 A-shares in 2012 compared to 33 new issues on Mumbai’s exchange. China’s IPO bottleneck has resulted in decreased private equity (PE) activity as well since most PE investors view the IPO as their exit strategy.
Both countries are moving towards full implementation of International Financial Reporting Standards, a convergence which will enable greater foreign participation. While there has been some talk that China will relax its Qualified Foreign Institutional Investor restrictions, as things stand now Mumbai will be the greater beneficiary from financial reporting standards convergence.
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