BOC A-share sale plan a sign of things to come for HK exchange
Beijing's decision to reopen its long-closed market for initial public offerings will have limited impact on Hong Kong, the stock exchange insists.
This may be wishful thinking.
The issue is not whether major state-owned enterprises such as Bank of China will be listed in Hong Kong or Shanghai. For reasons both pragmatic and political, Beijing will continue to encourage many of its biggest companies to sell shares here. And firms will continue to list in Hong Kong before selling stock in Shanghai or Shenzhen.
What really matters is whether currently state-owned shares will be converted into A shares or H shares.
To understand why this matters, consider that at yesterday's closing price of $3.475, the 88 per cent of Bank of China's outstanding shares that were not sold in its IPO would have a market value of more than $600 billion. Were they converted into A shares, the bulk of the bank's equity would trade in Shanghai.
Unfortunately, according to BOC sources, that's likely to be what happens. Upon the completion of an A-share sale probably some time this year, BOC is expected to convert its state-owned equity into tradable A shares, not H shares. Though there is no official government policy on the issue, many investment bankers believe most major state enterprises that sell shares in the future will follow suit.
That marks a big change from last October's sale of shares in the mainland's third-largest lender, China Construction Bank Corp, which listed all its shares in Hong Kong. Based on yesterday's closing price, that's $550 billion worth of market capitalisation, helping boost the city's rank among world financial centres.
Though some of Hong Kong's blue-chip companies would be happy to see that happen - after all, giant mainland firms will knock a number of them out of the Hang Seng Index - it's not good news for the stock market as a whole.
Size does matter for a stock exchange. Remember how exchange executives toasted the new record value of the Hong Kong market in a trading-hall ceremony last month. Such records could become much rarer. After all, the only foreseeable source of major listings in Hong Kong is the mainland.
There's not much the exchange or its majority owner, the Hong Kong government, can do about this shift.
Beijing is determined to build up the A-share market, which is only now shaking off a six-year slump. It's not hard to see why: The capitalisation of Hong Kong's market is seven times the city's gross domestic product. The mainland's two markets, by contrast, are equal to just 17 per cent of China's GDP.
And getting the biggest and best of mainland companies listed at home is a crucial part of that effort. Listing BOC's A shares alone will boost Shanghai's capitalisation by 19.3 per cent.
The move is also meant to deflect mounting nationalistic sentiment at home. Ever since China Mobile sold shares in Hong Kong in 1997 - and snubbed the domestic market - there has been a drumbeat of criticism that foreign investors were making huge profits at the expense of local investors who, after all, are the source of most of such companies' profit.
That anger welled over when Construction Bank's share price rose significantly above its IPO price. The principal of People's University, Jia Baocheng, lashed out during the last National People's Congress meeting, claiming that overseas listings of state enterprises have resulted in the loss of US$60 billion worth of state assets.
Bank of China will become a showcase of Beijing's efforts to address such concerns. But it's hardly the only step that's been taken. All of the state-owned enterprises that have converted non-tradable shares into ordinary equity have listed their state shares on the mainland stock market.
For now, Hong Kong will continue to attract mega offerings because there are serious doubts that the mainland markets can handle deals of that size. In the case of BOC, the planned A-share sale is expected to be valued at around 20 billion yuan, the largest mainland offering ever. Regulators want to make sure that a flood of new offerings doesn't overload the still-recovering market.
This explains why BOC has so far left open the question of what happens to state shares. 'This will give the bank maximum flexibility,' said one of the sponsors. In case of delay, the bank can still consider other options, including converting its state shares into H shares.
In the 11th five-year plan, the central government reiterated its support for Hong Kong's status as an international financial centre. That's good news. But there is no room for complacency in Hong Kong.