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.