Bank of China

Regulatory complacency a hurdle to foreign listings

PUBLISHED : Saturday, 17 November, 2007, 12:00am
UPDATED : Saturday, 17 November, 2007, 12:00am

Next Thursday, Professor Chan Ka-keung will make his maiden marketing tour as secretary for financial services and the treasury.

He will tell officials and businessmen in Vietnam, nicknamed 'Little China' by many, that Hong Kong is the best place to list the country's state-owned enterprises.

Given our market's huge turnover, success in financing mainland reform and unrivalled access to investment-thirsty mainland investors, this should be an easy preach.

Yet, it is not. Vietnam's leading dairy product maker, Vinamilk, earlier opted to list in Singapore.

In fact, no foreign company has ever applied to list in Hong Kong. This is despite a year-long marketing effort by the government and the stock exchange to lure overseas issuers here to balance our overreliance on mainland issuers.

The Singapore bourse, which faces the same drying up of listings from the mainland, is doing much better.

Of the 60 overseas companies listed or that have applied for a listing in the Lion City, nine have nothing to do with either the mainland or Hong Kong.

They come from India, Indonesia, Israel, Japan, Malaysia and Vietnam. Though real estate investment trusts continue to dominate, the increase in diversity is pretty impressive.

But why? Singapore's market capitalisation is only 18 per cent of ours. It has no mega-listings such as Industrial and Commercial Bank of China about which to blow its trumpet. It has no superpower like the mainland to pull political strings for it. One easy answer is that the Singaporeans started much earlier. 'There is a lead time in our effort,' said an exchange official.

It is also true that as a member of the Association of Southeast Asian Nations, Singapore enjoys a cultural and political advantage. One obvious benefit is visa-free travel among member countries.

It is also true that its government is deeply involved in attracting foreign issues. Its financial officials are said to have been instrumental in the drafting of Vietnam's securities rules.

But these reasons are insufficient to explain our failure to attract international listings. According to bankers, many Asian companies have in fact expressed strong interest in listing their mainland operations here but stopped short of proceeding. The reason: the complacency of our regulators.

This is best demonstrated in the unfriendliness of our rules to foreign issuers. In early March, the exchange issued a joint statement with the Securities and Futures Commission saying how much they welcomed foreign issuers and promising a streamlining of regulations.

The reality is different. An addendum to their statement said: 'For the purpose of determining whether an overseas company demonstrates acceptable shareholder protection standards, the Stock Exchange of Hong Kong ordinarily expects an overseas applicant to provide submissions to demonstrate appropriate shareholder protection standards in the various key aspects.'

That means, as the first company from your country to seek a listing here, you will have to bear the cost and responsibility of ensuring the compatibility of rules at home with Hong Kong.

This is on top of facing political hostility at home over a foreign listing and the uncertainty of investors' tastes here. 'Who will want to be the first,' said one investment banker who has a hard time luring overseas issuers to Hong Kong.

Sure, some will argue that a quality market like Hong Kong should put shareholder protection first. But then why does no other major market have similar requirements?

If shareholder protection is so important, why doesn't the exchange hire lawyers to find out which jurisdictions are compatible, as they did in 1989 with the Bermuda rules when our economy slumped following the Tiananmen crackdown?

If shareholder protection is so important, when the market tumbled under Beijing's austerity policy in the mid-1990s, why did the exchange accept infrastructure investors with limited track records?

It's hard to blame the exchange. Given three-digit growth in profit, which comes largely from trading and more than HK$130 million worth of share options maturing in a few years, not many want to opt for change and risk.

But for Professor Chan, I have high hopes. In his speeches last week, the ex-finance professor rightly pointed out that the mainland has turned from a capital importer into capital exporter. 'Many feel that it is time we diversify and reach out to foreign companies to expand our listings from overseas sources and, in turn, allow them to tap Chinese capital. Diversification is the name of the game.'

The question is how to achieve this. Experience has shown that the important task of making Hong Kong an international capital-raising platform should no longer be left with the exchange. Senior-level leadership is needed to push it through. Perhaps, sipping Vinamilk in a Hanoi hotel will give the professor some insights.