Ever since Hong Kong opened its port in the mid-18th century, the former fishing village in China’s southern coast has transformed itself into a global city and financial hub. China’s unparalleled economic growth over the past couple of decades has also led to an array of mainland Chinese companies to go public in Hong Kong, raising global capital to support their growth.
The Hong Kong Exchanges and Clearing Limited (HKEX), which owns the city’s Stock and Futures Exchanges, has benefited much from the IPO trove from the past, cementing its position as the world’s top bourse in six of the last ten years by IPO total fundraising size.
The bourse has not only been riding the wave of China’s growth but has also been keeping up with the times, scrapping outdated policies while rolling out new measures to ensure its competitiveness.
All these have helped HKEX to set itself apart from its counterparts. Now, as the world is being turned upside down due to the COVID-19 pandemic, with stock exchanges across the world reeling under pressure, the HKEX managed to perform well and maintain its momentum in attracting more tech unicorns that got caught in the geopolitical whirlwind between China and the US.
In today’s interview, we sat down with Christina Bao, deputy head of Marketing Development Division and head of Global Issuers’ Service at HKEX, to talk about how the bourse has come so far and the vision going forward.
The below interview is edited for brevity and clarity.
De-Stereotyping Chinese concept stocks
KrASIA (Kr): What do you think of financial fraudulent accusations against Chinese concept stocks such as Luckin Coffee, TAL Education Group, etc? Will HKEX increase its scrutiny over Chinese concept stocks going forward?
Christina Bao (CB): First and foremost, the revelation is that public companies always have to comply with regulations in terms of corporate compliance and information disclosure, no matter where they are listed. They are expected to operate their businesses with the highest possible integrity to win over trust and recognition from investors.
As a matter of fact, for almost every capital market—no matter in the US, China, or Europe—fraudulence and other risks do emerge from time to time. The market needs to be operated and regulated bearing that in mind. Yet it makes no sense to stereotype all Chinese concept stocks as frauds.
Each market’s regulatory system is correlated with its development phase, legal system, as well as the nature of investor groups. For instance, the US is a mature market with mostly institutional investors, so its registration-based IPO mechanism is less focused on the vetting process comparing to Asian bourses. But class action in its legal system enables investors to take legal actions to protect their interests. So, when a listed company is suspected of wrong-doing, there are effective legal means to enforce compensation.
Another thing is, when the stock houses are considering how to rid themselves of financial frauds, they could not just count on stringent approval to rule out the “bad apples”. Because even “good apples” could still turn into bad ones at a later stage on some occasions.
All in all, Hong Kong’s capital market has developed into a sophisticated one pivoted by independent, transparent regulation and legal systems. The Listing Rules and relevant regulations govern the IPO vetting process and ensure a fair and transparent approval. Issuers are obligated to comply with ongoing regulations once listed, and are subject to regulatory actions if a violation happens.
Kr: How do you compare American and Asian bourses, and which one do you think is better for Chinese new economy companies?
CB: The process for a company in choosing its listing destination is quite similar for someone who is deciding on a house purchase. There are a lot of factors to take into account. There is not an ideal market that fits for all, so each company will have to weigh in their specific demands and features of different exchanges. For instance, issuers often would wonder whether the approval system is transparent enough, whether they could have flexible re-financing tools in the secondary market after an IPO, what the investor base in this market look like, or whether there is enough appetite for similar companies to support good trading liquidity, and of course, the cost of listing, to just name a few. It’s surely a complicated decision.
The fact that many mainland Chinese new economy companies chose Hong Kong attests to the attraction of the city’s capital market for its transparent and efficient regulation, rich and various investor pool that comprises both Chinese and global investors, and the overall market efficiency.
Kr: With the introduction of the mainland Science and Technology Innovation Board (Star Market) and the ChiNext Stock Market, what do you think of the competition and relationship between mainland and Hong Kong bourses?
CB: I believe that Hong Kong and mainland bourses are mostly complementary to each other instead of competing against each other. We bear the common objective to support the growth of companies through efficiently operated capital markets.
Hong Kong has a globally recognized capital market that is mature, fast-moving, and that keeps innovating itself. There are clear and well-defined rules to stipulate and regulate IPO activities. Investors recognize the depth and openness of the Hong Kong market as well as free capital flows. The refinancing process and means have proved friendly and efficient, at the service of issuers.
All these strengths of Hong Kong markets will benefit and contribute to issuers’ funding plans in an efficient and cost-effective manner in years to come.
Attracting Southeast Asian unicorns
Kr: In addition to Chinese startups, Southeast Asia came into the spotlight thanks to its vicinity, investor sentiment, and a bountiful supply of unicorns. What measures has HKEX taken to attract them?
CB: I think that Southeast Asia is still at a different development phase when compared to China. But they do resemble China in some ways, probably in earlier stages, and due to the internet momentum and upcoming entrepreneurship in SEA, we believe the growth prospect is very promising, especially strengthened by a much younger demographic.
It’s out of question that this market is demonstrating its opportunities while maturing up, mostly supported by its large labor force, accelerated by the application of technology as well as strong internet penetration.
We are stepping up our marketing efforts in this area to attract South Asian companies to list in Hong Kong, while the first step would be helping them understand our IPO system and characteristics of the capital market of Hong Kong.
Additionally, we also have taken measures to enrich our offerings targeting the Southeast Asian market. For instance, we tied up with MSCI to roll out 37 futures and options contracts. It’s also a big step closer to HKEX’s international strategy. In May, HKEX has signed a major licensing agreement with MSCI Inc. to license a suite of MSCI indexes in Asia and Emerging Markets for the introduction of futures and options contracts in Hong Kong.
This collaboration further anchors HKEX and MSCI’s commitment to their long-term product development and innovation program in the region. The introduction of the 37 futures and options contacts is an important milestone and reflects HKEX’s unique position to connect the world. This key initiative has enhanced our product diversity and market liquidity, and also built on our growing momentum of “Trade Asia – In Asia.”
Kr: Though HKEX has rolled out a welcome mat for Southeast Asian startups, these companies have also other options such as NYSE and Nasdaq. What is HKEX’s edge over them other than the vicinity?
CB: Hong Kong has always been an international market that attracted many global companies, two latest examples include Budweiser and ESR which were listed in HK in 2019.
First, bourses serve as platforms connecting issuers and investors. For the issuers, the choice of markets amounts to what types of investors you’d like to establish relationships with in the long run. International investors take up more than half of Hong Kong capital market’s total investor pool in terms of trading volume contribution. Listing in Hong Kong provides the advantage of accessing global investors in the issuers’ own time zone.
As more and more Chinese investors join the Hong Kong capital market in the past few years, SEA issuers will also benefit from having access to these Chinese investors, some of whom are already very active in investing in them when these companies are private.
The familiarity of Chinese investors in the Southeast Asia market certainly serves as an extra advantage partly due to quite a number of comparable Chinese tech companies already listed in Hong Kong. This is important as it can help draw references from the IPO pricing and valuation perspective. Since 2018, new economy companies’ IPO accounted for more than 50% of HKEX public listings, and the figure is still growing. That has laid a solid groundwork for Southeast Asian companies to find their comparables that already enjoy investors’ appreciation with decent liquidity in Hong Kong.
Last but not the least, Southeast Asian unicorns share many similarities with their Chinese counterparts in business models. Due to their vicinity, social environment, and market composition, Hong Kong investors might find them easier to understand.
Kr: Let’s talk about secondary listings. Not just Chinese concept stocks, what about the plan for Southeast Asian listed companies.
CB: There is a separate chapter in the Listing Rules which allows eligible Chinese concept stocks for a secondary listing in Hong Kong with some exemptions, while primary listing has always been an alternative. For the large-cap US-listed Chinese companies, secondary listing usually serves them better as they can keep their US listing status and expand their investor base through a secondary listing in Hong Kong.
For Southeast Asian companies, if they are already listed in a qualified exchange, such as Nasdaq and NYSE, they could also consider a secondary listing in Hong Kong. We understand some of them are listed locally, while the local stock exchanges are not recognized by HKEX yet. In this case, they might have to consider dual-primary listing instead.
Be the Bridge
Kr: HKEX had a solid performance, topping the IPO market globally last year, the sixth time in the past decade. What is your expectation for this year?
CB: The performance is a result of multiple reasons, among which we can include China’s continuous opening up, reforms, and economic growth. While to some extent, HKEX provided China’s businesses with a bridge or connection to the rest of the world.
By 2019 China outnumbered the US in terms of unicorns accordingly to certain statistics. Technology and new economy startups have made their fair share of contribution to the country’s economic growth.
Two decades ago, new listings in Hong Kong were dominated by state-owned enterprise (SOEs) and financial institutions. In the past decade, more and more new economy companies joined the force, especially in the last two and three years, when we saw that half of the IPOs funds were raised for new economy companies.
As the bridge between China and the world, Hong Kong will maintain its strength to keep up with the changing times. We rolled out new listing rules in 2018, with accommodations for pre-revenue biotech companies, companies with weighted voting rights (WVR) structure, as well as secondary listings. In retrospect, all these reforms worked well.
IPOs in the first quarter of this year were slowed due to the pandemic, but HKEX maintained its momentum, showcased by the strong performance especially in telecommunications, media & technology (TMT) and the healthcare sector in the second quarter. As of June, there are 123 companies from various sectors—TMT, biotech, consumption, etc—that filed for IPO. In general, we are confident that the Hong Kong IPO market in the second half of 2020 will continue to be strong.