Why Hong Kong is the answer to China’s problems
Hong Kong’s ability to list mega companies is a huge asset to the mainland – it is a piggy bank that provides cash in return for obeying a few rules
The playground squabble that went for a chief executive debate mentioned little about Hong Kong being the answer to anything. But we can help China in a big way with something we are really good at: money.
The biggest chunk of money lumbering down the track at the moment is the planned listing in 2018 of what is probably the world’s biggest company, Saudi Aramco. This is neither hippo, nor elephant – it is a whale. Aramco controls the world’s biggest oil reservoir beneath Saudi Arabia and is said to be valued at a cool US$2 trillion. That makes it equivalent to the eighth largest economy in the world, after India.
Hong Kong should be proud that its stock market is in the running for this global listing. Not Beijing, not Frankfurt, not Singapore. Only London, New York, and at a pinch Tokyo can compete. Companies listing their stock want savvy invest+ors, deep and active trading, and a pipeline to lots and lots of lovely money.
Hong Kong frequently tops the global list for international public offerings and has been the choice of three out of five of the largest placements ever. The Shanghai-Hong Kong Stock Connect puts Chinese investors within reach. The listing would sit alongside those of other state-owned oil giants like CNOOC, PetroChina and Sinopec.
Saudi Aramco will initially list as much as 5 per cent of the company, which if current valuations hold true would be US$100 billion – some four times larger than Alibaba Group Holding’s record issue in 2014. In comparison, the Postal Savings Bank of China floated 15 per cent in Hong Kong last year to raise “just” US$7.4 billion.
But we’re not there yet. London has the biggest chance – it is the Middle East’s summer playground and is currently bigger than us in terms of volume traded. It is also the home of many highly seasoned petrocarbon analysts and active oil investors. New York is the main contender with the money, the depth, the technical experts and the sophistication to pull it off; but it comes with recently acquired political baggage that may bite.
Even if Hong Kong misses out, there is no shame – just to be in the top three of global stock exchanges is impressive, and we may still get a secondary listing.
But there are more unsung whales coming down the pipeline. Those very attributes that may attract Aramco also offer real benefits to Chinese state-owned companies looking to raise capital for themselves and their owners. One monster is the China National Tobacco Corp, which towers over its next five competitors combined – and that includes Philip Morris, British American, Japan Tobacco and Imperial Tobacco.
China Tobacco has a 98 per cent market share, according to Bloomberg, makes more than 2.5 trillion cigarettes annually, is sold under 160 brands from 100 factories, and employs half a million people in an industry that supports 20 million. It provides the Chinese government with 7 per cent of its revenue, helped by restricting imports of the filthy weed made by western brands.
The company has accumulated a huge cash pile, reinvesting it in banks, hotels, power plants, a golf course, and even pharmaceuticals. In 2012, it generated US$170 billion in revenue, 10 per cent more than Apple. On those valuations it might be worth nearly US$1 trillion. Not quite an Aramco but still most impressive.
In the near future, China is going to need cash – every country does, especially superpowers. Funds to pay for the ‘Belt and Road’, extra welfare and military spending, and for bailing out highly indebted local authorities, are currently locked up in piggy banks like China Tobacco. Privatisation of state assets was unthinkable in Saudi Arabia not long ago but they need to plug their budget deficits. Privatisation raises cash, shifts jobs to the private sector and gets the government off the hook. China could increase the pace of privatisation and that would put Hong Kong in pole position for big listings – making us even more attractive to the likes of Aramco.
As time goes on, China will need to privatise more and more companies to raise cash and Hong Kong’s ability to list mega companies is a huge asset to the mainland. It is a piggy bank that provides cash in return for obeying a few rules: account honestly; be transparent; follow the market misconduct regulations; disclose asset values; and announce directors’ compensation.
Hong Kong still has a real role to play, both on the global stage and in helping China’s development. Let’s hope that our chief executive candidates can keep up.
Richard Harris is an investment manager, writer, broadcaster and financial expert witness