The marriage between mainland enterprises and the Hong Kong Stock Exchange was one of necessity. With domestic markets held back by an overhang of state-owned non-tradable shares – and, for a year, off limits while the authorities tended to the problem – China had little alternative but to raise capital overseas.
Hong Kong’s mature and well-governed market was the obvious choice.
Since the first H-share listed in 1993, US$190 billion has been raised by mainland enterprises in Hong Kong, 55% of the total. By the end of 2006, the 367 H-share, red chip and non-H-share private companies on the main and GEM boards accounted for half the total US$1.7 trillion market capitalization. They were also responsible for 60% of daily turnover.
Last year was a tour de force with a record US$44 billion raised in new funds, 91% of it by mainland enterprises. Leading the way was Industrial and Commercial Bank of China (ICBC), a dual listing with Shanghai that went for a world record US$21.9 billion.
Sadly for Hong Kong, this will not become an annual event.
"The total amount of capital raised through IPOs will be less than last year, there is no ICBC now," said Lawrence Fok, head of business development at Hong Kong Exchanges and Clearing. "However, there has been quite a lot of secondary fund raising in the market – people are looking for opportunities in relation to economic growth in China."
Yet Hong Kong must also contend with a rejuvenated Shanghai market and central authorities that are keen to have local companies list at home.
Accountancy firm PricewaterhouseCoopers has predicted that funds raised in the Shanghai and Shenzhen A-share markets will rise by about 50% to more than US$25 billion in 2007, while Hong Kong slips 56% from last year’s total.
End of the party?
What’s more, bankers told media sources in April that Beijing had introduced an unofficial policy banning mainland companies from issuing shares in Hong Kong unless they planned to raise more than US$1 billion or were willing to do a joint listing in the mainland.
"It’s not been officially confirmed but it’s a clear understanding," said Ashley Alder, head of Herbert Smith’s corporate practice in Asia, formerly executive director for corporate finance at the Securities and Futures Commission (SFC).
"There are clear policy reasons and pressures in China to improve the quality of the Shanghai market in all kinds of dimensions and one of those dimensions is to bring in quality companies."
Facing the prospect of fewer mainland listings, the Hong Kong Stock Exchange is making efforts to be more geographically inclusive – it has already amended its 2007-09 strategic plan to include "the rest of Asia," and marketing trips are being made to unfamiliar places.
"We have been to Vietnam because we have heard that some of the companies are seeking funding overseas," said Fok. "We have also been to Kazakhstan, Thailand, Malaysia and South Korea. We have introduced our market to places we would not have thought doing so a year ago, such as Russia."
In the past, the stock exchange’s attention has been so single-mindedly focused on China that insufficient information has been passed to other potential share-issuers, according to Jamie Allen, secretary-general of the Asian Corporate Governance Association.
"The exchange has not spent a lot of time marketing itself around the world and, as a result, there is a misconception that Hong Kong is not open for listings beyond the six approved jurisdictions – Hong Kong, China, Bermuda, the Caymans, Australia and Canada," he said.
It is also argued that, having lived off a diet of mainland IPOs for so long, the exchange is not in the best of shape.
"Hong Kong has become too dependent on these big IPOs," said Ben Simpfendorfer, a Hong Kong-based economist with Royal Bank of Scotland. "They make things look good when in fact there are still problems. Hong Kong doesn’t have a developed bond market, it doesn’t attract hedge funds and, unlike Singapore, it has no large private wealth industry."
Singapore, which leads the region in currency trading, was also cited as the one to watch by Bank of East Asia Chairman David Li at the unveiling of the action agenda that came out of the summit on Hong Kong’s development within the context of China’s 11th Five-Year Plan.
Li, who convened the summit’s working group on financial services, also warned that Hong Kong was too dependent on IPOs, bemoaning its lack of a commodities futures market.
As far as financial services are concerned, the action agenda calls on Beijing to use Hong Kong as a testing ground for renminbi convertibility and as a location for a Chinese currency futures and options market, measures that would build on the already approved sale of renminbi-denominated bonds in the territory.
Another provision in the agenda is closer integration with the mainland markets.
Working Groups have been set up, tasked with finding ways to facilitate A- and H-share dual listings as well as ironing out differences in secondary market procedures and information disclosure.
A breakthrough was also made recently on enforcement, as the SFC struck a deal with the China Securities Regulatory Commission (CSRC) that will enable it to request assistance from its mainland counterpart in obtaining information in China. What’s more, the CSRC can pursue court action if the required information is not surrendered.
"This has been an ongoing problem," said Allen. "Hong Kong authorities cannot just go into China and investigate cases, compel witnesses to come forward. This more proactive agreement to help one another is a big step forward."