During a speech last month, China Securities Regulatory Commission Vice Chairman Fang Xinghai announced new measures signifying the broadening mutual access scheme between the Mainland and Hong Kong financial markets. One of them is the inclusion of Hong Kong-listed international companies in Southbound Stock Connect, an initiative that will give investors in the Mainland the opportunity to access the securities of international companies through the trading channel.
Bonnie Y Chan, Head of Listing at Hong Kong Exchanges and Clearing Limited (HKEX), says this is game-changing for the city as a listing hub. “For international companies that want to capture the potential of Mainland’s huge investment pool, they only really have two choices – try to go onshore to get listed, which at the moment there’s no easy way of doing, or get listed in Hong Kong and tap the Mainland investor base through the Stock Connect programme. We are the only international capital market which is able to offer that possibility.”
This should come as welcomed news, particularly after the slowdown in initial public offering (IPO) activity globally during the first six months of the year, reflecting global market sentiment and the continuing impact of the pandemic. “With the new initiative, we hope we’ll build on our high-quality capital raising hub for companies around the world,” says Chan.
As head of HKEX’s listing division, Chan is constantly looking at ways to further elevate the quality of Hong Kong’s market. Her listing team acts as frontline regulators of Hong Kong’s listing market, reviewing and approving IPO applications, and supervising the ongoing compliance by listed issuers with their obligations under the listing rules. Another key role of the division, she says, is to continue enhancing the rules that govern the eligibility of listing in Hong Kong. “When people talk about the listing division, they usually think about how we monitor listed companies for their compliance, which obviously is a very important part of what we do. But the more impactful part is creating new opportunities through new chapters [of the Main Board Listing Rules]. That to me is very rewarding,” she says.
But creating listing policies is also the most challenging part of her team’s work, Chan adds. “As a regulator, we need to map out the wishes and the demands of all our stakeholders, which includes a very broad spectrum of buy-side, sell-side professionals and intermediaries, regulators and government. There’s never perfect alignment, but what we do is create a solution that most of these stakeholders will find acceptable and satisfactory.”
Transforming the framework
Over recent years, numerous adjustments to HKEX’s listing rules have been made, including the creation of three new chapters in 2018: Chapter 8A, which accepts companies with weighted voting rights structures; Chapter 18A, which deals with the listing of pre-revenue biotech companies; and Chapter 19C, which creates an easier path for Greater China companies to come to Hong Kong for a secondary listing. “We were targeting new economy companies back then, and it’s translated into positive results. With our listing pipeline, these days we are increasingly seeing the centre of gravity migrating to new economies rather than traditional companies. So that was very successful,” says Chan. From 2018 when the new listing rules took effect until September this year, 227 new economy companies listed in Hong Kong, raising a total of HK$893.3 billion and which accounted for 63.8 percent of IPO funds raised in the city during the period.
To facilitate the listing of innovative companies, HKEX launched a market consultation on new listing rules for specialist technology companies in October. The proposed rules will enable eligible pre-revenue and revenue making companies in five frontier specialist technology sectors to list in Hong Kong, including next generation IT, advanced hardware, advanced materials, new energy and environmental protection, and new food and agriculture technologies. “The initiative takes into account the uniqueness of the role technology plays in these businesses and their early stage of development relative to other listing applicants, supporting their fundraising needs,” says Chan.
“If we want to live up to that claim, we need to make sure that we attract not only the best Mainland companies, but also the best international companies.”
HKEX has also made it easier for international companies to list in Hong Kong through its overseas issuers listing regime, which took effect in January. Doing this exercise was important for improving Hong Kong’s competitiveness as an international financial centre, says Chan. “If we want to live up to that claim, we need to make sure that we attract not only the best Mainland companies, but also the best international companies,” she explains, noting that over the past decade companies such as Prada, L’Occitane, Samsonite and Budweiser APAC have listed in Hong Kong. “But we also heard from these companies about areas where we could improve. Therefore, one aspect of last year’s enhancement of our rules is to make sure that the regime includes measures that would enhance our market’s accessibility for international companies.
“It used to be the case that before companies come to Hong Kong, they first needed to qualify their jurisdiction as an acceptable jurisdiction, and that involves a complicated exercise of comparing the shareholders protection features. We levelled the playing field so that regardless of where you come from, all you need to demonstrate is that you have fulfilled one set of Core Shareholder Protection Standards. With the new listing rules, we think we are very well-positioned to support this new pipeline of international companies.”
Chan says that the second aspect of the regime is to support a vast pipeline of homecoming IPOs or listings, by which overseas-listed Mainland companies come to Hong Kong by means of a secondary or dual primary listing. Under the new listing regime for overseas issuers, for example, a United States-listed Chinese company without a weighted voting rights structure may seek a secondary listing on HKEX without demonstrating it is a company from emerging and innovative sectors, and with a lower market capitalization requirement.
“We’re seeing an increased number of homecoming listings – now we have around 30. Interestingly, many of these companies have opted to come back by way of a dual primary listing as opposed to a secondary listing. I think the reason for that is because if you are dual primary listed, you may be eligible for Stock Connect and that’s a big attraction. In fact, a lot of the companies which were secondary listed on our exchange have now applied to become dual primary listed,” says Chan. She expects the new listing rules will continue to facilitate this ongoing trend.
Bonnie Y Chan was appointed Head of Listing at HKEX in January 2020. As part of her role, she oversees the development of listing policies.
Maintaining market quality
Most recently, HKEX also introduced a listing framework for special purpose acquisition companies (SPACs). Chan recalls how fast the process was from consultation to launch, with the consultation initiating in mid-September 2021 and the first SPAC being listed in March 2022. “That is six months, which is the fastest time we’ve completed an exercise,” she says. Speed is necessary, she points out, as there are growing market expectations. “We need to get these new chapters ready so that when the market improves, companies can immediately get listed. But at the same time, we make sure we have a high-quality SPAC regime that strikes the right balance between business considerations and investor protection.”
She calls it fortuitous that HKEX was able to study existing models in the SPAC space, such as the U.S. regime. “From the get-go, I think we had the benefit of learning from other people’s lessons. And we had a few general principles. First of all, we decided that we are not going to create our SPAC regime to enable ineligible assets to get listed. We know we have to hold the line very firm to maintain our market quality,” says Chan.
“Number two is we want to make sure that we introduce elements of independence in the whole valuation process. And to do that we introduced this element of minimum independent private investment in public equity, or PIPE investors, so that when a SPAC eventually de-SPACs, you introduce another participant at the bargaining table. They have an interest to negotiate with the SPAC promotor and the business owner, and you end up with a sustainable level of valuation.
“So far as IPOs are concerned, they will continue to be very critical. They are the gatekeepers.”
“The third thing is that the SPAC regime is designed to be a professionals-only product before the de-SPACing process,” says Chan. She points out the reason for this is based on a SPAC entity being a “cash company,” meaning that any volatility in the stock price would likely be a result of speculation. “We found it too risky placing it in the hands of retail investors,” she says.
Chan points out that this is an innovative aspect of the regime. “It’s the first time Hong Kong is able to design new listing rules that allow or disallow participation of certain pockets of investors, commensurate with the risk of the product. And that’s useful because that would give us even more latitude to design products of different risk levels.”
In the process of developing the SPAC regime, HKEX was in close dialogue with the accounting profession. “A few members on our Listing Committee are accountants by training, and they gave us very good advice in terms of how we should design rules,” says Chan. “I thought that was a very good collaboration.”
She says that accountants, particularly those who specialize in IPOs, have long played a key role in the listing process. “So far as IPOs are concerned, they will continue to be very critical. They are the gatekeepers. They are there to kick the tyres on the financials and I think they will continue to bring huge value in that regard.”
Evolving ESG journey
HKEX’s environmental, social and governance (ESG) journey started in 2013, when it introduced its ESG Reporting Guide and has since continued to upgrade the disclosure obligations of listed issuers. It is now keeping a close eye on international developments in relation to climate reporting. “Without good reporting or data disclosure, funds would not be able to employ their capital. There’s a clear commercial rationale,” says Chan.
She says that while the International Sustainability Standards Board (ISSB) is working to launch its sustainability-related financial reporting standards, which are expected to be announced early next year, HKEX, alongside the Securities and Futures Commission, are preparing their public consultation on a climate reporting framework. “In the last few months, we have embarked on very robust rounds of soft consultation. We have spoken to over 50 different sets of stakeholders, including listed companies and other professional groups. We are mindful that it’s a big exercise, and depending on listed companies’ scale and access to resources, they may have different varying levels of readiness in terms of being able to comply with climate disclosures requirements.”
HKEX is reviewing its rules to further enhance climate disclosures to align with the new ISSB standards, says Chan. “We hope the ISSB standards will generally be what investors are looking for in terms of climate disclosure for them to make their investment decision. We will closely monitor the international regulatory developments in this regard, and continue to provide guidance and training to our listed issuers to promote ESG and climate change stewardship.”
Chan says that climate reporting is an area where accountants can play a substantial role. She points out that based on the soft consultation of its rules, it is evident that there is a need among listed companies for more advisors to help them comply. “One comment we keep getting is that ‘we don’t mind doing the work and complying, but we cannot find enough advisors in the market to help us with our climate reporting.’ I think the biggest auditing firms already know that they need to make the investment and build capacity in this area. It’s just that the pace needs to be accelerated as there are a lot of opportunities there for the profession.”
As well as the development of ESG reporting, Chan is looking forward to seeing more women sitting on the boards of Hong Kong-listed companies in the near future. Starting from July, HKEX no longer accepts IPO applicants with single-gender boards. Existing listed issuers with single gender boards have until 31 December 2024 to appoint at least one director of a different gender. “I think it’s going to create a very strong momentum. For new listings, usually we’ll have about more than 100 new listings each year. Even if everyone simply has at least one female director, that’s already a big pool of female talent we’re adding,” she says.
According to Chan, a third of existing listed issuers have all-male boards, accounting for around 800 companies. “I don’t think they’re going to wait until 2024. I think the churn will start whenever they have to bring in a new director, so that’s going to be quite exciting.”
Chan graduated from the University of Hong Kong and Harvard Law School. Besides her two stints at HKEX, she has worked as a solicitor, banker and in-house counsel for an investment bank.
Leading to win
Chan graduated from the University of Hong Kong and Harvard Law School. She has worked as a solicitor, banker and in-house counsel for an investment bank. “These were diverse experiences that gave me different perspectives when approaching a new problem,” she says.
Chan first joined HKEX in 2007 as head of the IPO department, and moved to private practice in 2010. She then spent nine years with international legal firm Davis Polk in Hong Kong as a private practitioner before assuming her current role. “HKEX is one of the world’s biggest and most-respected exchange groups in the world. I am as exhilarated as I was when I first joined in 2007 to play a role in carving the future of global financial markets. In the past two years, I have had the privilege to continue working with a very professional team, and together we have driven a number of initiatives that have contributed towards Hong Kong’s enduring success as an international financial centre.”
As Chan oversees the listing function’s relationships with key stakeholders, she says that the ability to address the needs and pain points of different stakeholder groups is crucial in her current role. “For example, in 2020, we worked very closely with the accounting profession to overcome audit challenges resulting from the COVID-related travel bans. Through our direct engagement with the accounting profession and the affected listed issuers, we were able to come up with innovative solutions that kept the market informed. Having the empathy to appreciate and address the difficulties of the affected stakeholders was key to get that challenge to a safe resolution.”
A new passion that Chan developed during the pandemic is weight training. “Since COVID, it dawned on me that it is very important to make sure that I’m physically and mentally fit. So I began going to the gym about a year ago, and now I’m completely hooked, going to the gym five times a week.”
This fitness side of her was highlighted during a recent two-month corporate wellness challenge for HKEX staff, in which she came in among the top few performers across the entire organization. “More than a thousand colleagues joined; I did 4,300 kilometres of cycling in two months, and the listing team won the challenge as a division,” says Chan, still shocked. “There were moments, especially after the first month, where I thought I was going to give up, but I stuck with it thinking I should set an example for my team.”
In line with the prevailing global trend, fundraising activities slowed in Hong Kong, but on the upside, Hong Kong saw an increase in IPO activities in the third quarter this year, with 27 IPOs raising a total of HK$51.3 billion, more than twice that had been raised during the first two quarters of 2022, according to KPMG’s report: Mainland China and Hong Kong IPO markets: 2022 Q3 review.