Edward Au FCPA (practising), Vice-President of the Hong Kong Institute of CPAs and Southern Region Managing Partner, Deloitte China
As a world city, Hong Kong’s vibrancy and energy – and resilience – is unmatched. Its capital market shares these qualities.
In the past few years, the Hong Kong Stock Exchange (HKEX) has transformed its listing regime to accept companies with weighted voting rights (WVR) structures and pre-revenue biotech stocks, and created a concessionary route for secondary listings of companies already on qualified exchanges overseas. Most recently, the HKEX introduced a listing framework for special purpose acquisition companies (SPACs). It is also working on a platform that is set to launch before the end of this year, which will streamline and digitalize initial public offering (IPO) settlement to improve efficiency and reduce risk. These efforts have already produced some outstanding results and landmark moments.
Given the future of every capital market hinges on whether it can accommodate new economy companies, and with all the aforesaid enhancements, Hong Kong’s listings infrastructure is almost on a par with that of the United States, which led the world in IPO volume and value in 2021. However, to ensure Hong Kong remains a leading international IPO hub, it will need to continue to innovate.
The SPAC regime creates an ideal opportunity to do this. Currently, it allows only professional investors to subscribe for and trade in a SPAC’s shares before its de-SPAC transaction – which dissolves the SPAC and creates a regular publicly-listed entity – is completed. This tiered regime is an opportunity to expand the types of innovative product offerings in the market before they are introduced to retail investors, which is good for investor protection.
It would also strike a balance between upholding retail investors’ interest and deepening the market by increasing its appeal to the ever-evolving classes and demands of investors, while aligning with the development goal under Mainland China’s 14th Five-Year Plan of making Hong Kong an international hub for innovation and technology.
Investor education would be vital to these efforts, and should be improved and expanded in line with market developments. It is equally important to expand the mutual market access to Mainland China to increase market connectivity and allow more investors, in particular those from the Greater Bay Area, to participate. Hong Kong has the most successful Stock Connect scheme with Mainland China and this gives it an edge in appealing to more international listings.
“To ensure Hong Kong remains a leading international IPO hub, it will need to continue to innovate.”
Kin Yung CPA, Director at CCB International Capital Limited and member of the Institute’s Corporate Finance Committee
Hong Kong’s IPO market has ranked number one in the world in seven of the 12 years from 2009 to 2020. However, the competition among international financial centres is cutthroat, and there is still a lot of effort to be made in order to maintain the city’s leading position as an international IPO hub.
First and foremost, we should promote and encourage market diversification. Today, Hong Kong stock market heavily relies on Mainland China for its pipeline of the IPO candidates. In 2021, we recorded a drop in both IPO fundraising amount and number of deals, in part due to Mainland companies listing on A-share markets instead. Indeed, we noted that Mainland stock exchanges reported record high fundraising last year.
Secondly, our regulations should keep moving with the times. In the past few years, our regulators have already made great efforts on this, and the result has been thrilling. For example, since 2018, we have launched new listing rule chapters to attract new listings. Pre-revenue biotech firms (under Chapter 18A) and innovative companies with WVR (under Chapter 8A) have been attracted to list on our markets. The HKEX has also made secondary listings (under Chapter 19C) on our markets easier. Hong Kong is now the world’s second largest funding hub for biotech companies.
Going forward, we are expecting more and more new regimes to launch for us to keep up with the market trend and maintain competitiveness as a fundraising hub. In December 2021, we launched a SPAC listing regime. SPACs have been the hottest fundraising trend for start-ups in the recent two years. However, our key competitor, Singapore, published rules for SPAC listing in September 2021, and the first SPAC was listed on Singapore Exchange.
Besides attracting quality IPO candidates to the Hong Kong market, maintaining a liquid and efficient post-IPO secondary market is another key issue. The Stock Connect scheme launched since 2014, a collaboration between the Hong Kong, Shanghai and Shenzhen Stock Exchanges, provides the opportunity for Mainland China’s investors to trade stocks listed in Hong Kong. This is an important incentive for overseas companies to list in Hong Kong in order to gain access to Mainland capital. In the future, besides attracting investors from Mainland China, we should also diversify the investors’ base to maintain Hong Kong’s open and highly liquid and deep stock market.
Finally, we can further enhance the attractiveness of the Hong Kong stock market by reducing the regulatory burden for listing. This does not mean lowering standards, but streamlining the regulatory processes to a suitable level and promoting the right balance between safeguarding the market and efficiency.
“Maintaining a liquid and efficient post-IPO secondary market is another key issue.”
C. Y. Wong CPA, Director, Corporate Finance, OCBC Bank and member of the Institute’s Corporate Finance Committee
Hong Kong has been the gateway for international investment to access the Mainland China market since it opened up. After Tsingtao Brewery successfully listed on the HKEX in 1993, the HKEX became the choice of Mainland corporates to access foreign equity funding. With TIME magazine recognizing Hong Kong as one of the three most remarkable international cities together with New York and London in 2008, describing them as “Nylonkong,” Hong Kong cemented its position as a leading international capital market in the Asia-Pacific region.
However, if we take a closer look at the composition of the listed companies in HKEX, it is not difficult to conclude that the Hong Kong market is overly China-focused. The stock exchange had admitted that the Hong Kong IPO market has “significant and growing dependence on the Mainland” where China-related IPOs accounted for 60 percent and 91 percent of the total number of IPOs and funds raised respectively in 2011 to 2016, and the international companies that listed on HKEX “tended to have strong linkages with China.”
To maintain, or further develop, our international status, we must move swiftly to make the Hong Kong market truly international or risk being left behind when the entire world is innovating.
Unlike the U.S. market, retail investors represent a significant portion of the investor base in Hong Kong market. However, as retail investors tend to favour familiar household names, the IPOs of quality companies with little presence in the Greater China region are always overlooked and have negatively impacted the valuation of these companies. With the geopolitical tension rising significantly in recent years, it is widely expected that a number of U.S.-listed Chinese issuers will come to list in Hong Kong, and we should grab this opportunity to bring their international investors to the Hong Kong market. Once those investors are committed to the Hong Kong market, efforts should be made to attract them to look into other IPO investment opportunities and diversify the Hong Kong investor base. By offering better valuation to companies, Hong Kong could compete with other international markets in attracting quality companies to list in HKEX, and thereby create a virtuous cycle for the Hong Kong IPO market.
What’s equally important is that the regulators must crack down on patriarchal leadership. The Hong Kong regulators should focus on ensuring the market is fair and efficient, and leave it up to investors to decide what is a safe investment.
“We must move swiftly to make the Hong Kong market truly international.”
