Alibaba's loss won't damage the Hong Kong stock market

Mainland internet retail giant Alibaba has now joined Manchester United Football Club on the list of companies that approached the Hong Kong Stock Exchange with dodgy listing proposals, only to be sent packing.

Some observers will lament the loss of Alibaba, which now plans an offering in New York, as a blow to Hong Kong.

Certainly the city's investment bankers, capital market lawyers and accountants will mourn Alibaba's departure.

With the company planning to sell shares worth as much as HK$100 billion - outweighing all Hong Kong's new listings over the last 12 months put together -

Alibaba's offering would have represented a bonanza in fees.

No doubt Hong Kong government officials and local stock brokers will also regret Alibaba's departure.

The company had promoted its listing proposal by arguing that trading activity on the Hong Kong stock exchange is declining, both in absolute terms and as a proportion of regional equity market turnover (see the first chart).

Successfully attracting a high-profile listing from a big technology company would be just the thing to boost Hong Kong's trading volumes and revitalise the local market, Alibaba claimed.

But to win the deal, the firm argued, the Hong Kong stock exchange would have to accept that innovative technology companies like Alibaba need to operate under different rules.

To preserve Alibaba's culture and to protect the business from unwanted interference from shareholders, Alibaba's bosses insisted that they should keep control of the company.

Ideally they would have liked to have gone public with two share classes, which would have allowed them to retain most of the company's voting power.

When that was ruled out, they suggested a "partnership" structure, which would have granted Alibaba's management, which collectively owns 10 per cent of the company's shares, the exclusive right to nominate the majority of directors.

That way, the bosses said, they would be able to serve shareholders by developing long-term business opportunities free from unreasonable demands to boost short-term profitability.

Both claims - that winning Alibaba's IPO could reverse a decline in Hong Kong's market and that the suggested "partnership" structure would be in the interests of investors - were deeply disingenuous.

It is true that Hong Kong's turnover is relatively low as a proportion of capitalisation, and that the city's share of regional trading is declining.

But Hong Kong's turnover is low relative to other major exchanges simply because the local market's free float is low, with many listed companies tightly held by controlling shareholders (see the second chart). Floating 10 per cent of Alibaba would do nothing to change that.

Meanwhile Hong Kong's share of regional trading is falling largely because local stamp duties discourage high-frequency algorithmic trading, which is taking off in other major markets like Japan.

The claim that Alibaba's proposed "partnership" structure would benefit shareholders was similarly hollow.

The company said it would be preferable to two share classes. In fact it would be worse, allowing managers to sell down their own shareholdings entirely but still keep control of the company, regardless of investors' wishes.

Indeed, the only possible reason managers would demand the right to stuff the company's board is that they anticipated future conflicts with shareholders.

So well done to the Hong Kong stock exchange for resisting Alibaba's pressure, and recalling that it is meant to act in the interests, not of corporate managers or bankers, but of small investors.

Rejecting Alibaba can only enhance, not damage, Hong Kong's credibility.

tom.holland@scmp.com