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 state-owned shares will be converted into A shares or H shares. To understand why this matters, consider that the 88 per cent of Bank of China's outstanding shares that were not sold in its IPO will instead be listed as A shares in Shanghai. That means that the bulk of the bank's equity will trade on the mainland's biggest market.
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. That is about $550billion worth of market capitalisation, helping to boost the city's ranking among world financial centres. Though some of Hong Kong's blue-chip companies would be just as happy to see most state-owned shares converted into A shares - after all, giant mainland firms will knock a number of them out of the Hang Seng Index - it is 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 this spring. Such records could become much rarer.
After all, the only foreseeable source of major listings in Hong Kong is the mainland.
There is not much the exchange or 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 is 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 about 19 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 China 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 had resulted in the loss of US$60billion worth of state assets. Bank of China will become a showcase of Beijing's efforts to address such concerns. But it is hardly the only step that has 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 A-share sale was the largest mainland offering to date. Regulators want to make sure that a flood of new issues does not overload the still-recovering market.
This story first appeared in the South China Morning Post's Business section on June 3, 2006