Hong Kong should not be a dumping ground for middling IPOs
Possible end to policy requiring mainland firms seeking funds in city to seek approval may result in a flood of listings by second-rate firms
"As long as you can meet the listing requirements of the Hong Kong stock exchange, you should definitely go there."
That was the clear message from one of the most senior stock market regulators on the mainland when asked about the funding needs of small-sized, capital-hungry private enterprises.
During the once-a-year political summit in Beijing last week, Yao Gang, vice-chairman of the China Securities Regulatory Commission, said the mainland's stock market watchdog may simply abolish a policy requiring mainland companies planning a listing in Hong Kong to first seek approval from the CSRC. This will make it easier and faster for mainland companies to raise capital on the Hong Kong stock exchange in the foreseeable future.
Yao's comment is certainly good news for mainland firms fighting the nationwide economic downturn, tightening loan approvals from local banks and a 15-month suspension of domestic listings in Shanghai and Shenzhen where the mainland's two national bourses are based. But is this really good news for Hong Kong?
The Hong Kong stock exchange may welcome the move as more IPOs from the north could strengthen the city's position as a global capital-raising centre - it was the world's No2 destination for IPOs in terms of total amount raised last year. The New York stock exchange was in first place.
Investment bankers will also welcome the move for sure. The more IPOs, the more fees they get, and that also means bigger bonuses. However, let's consider the quality of the IPOs rather than the quantity.
Last week in Beijing Yao encouraged the nation's small and medium-sized private enterprises to first consider Hong Kong, not Shanghai or Shenzhen, for listing partly because of the widely accepted assumption in the financial industry that small firms have an easier time raising money here than on the mainland.
He also indicated that large state-owned enterprises, although they have the freedom to come to Hong Kong for IPOs, should still consider domestic listings as their first choice. Fund managers say Yao's comments are in line with Beijing's long-term stance that quality blue-chip companies should list domestically so mainland investors can first share in their business success, and perhaps enjoy fat dividends as well.
Then what about Hong Kong? By welcoming these smaller firms from the north, which may find it hard to raise money at home, are we turning the Hong Kong stock market into a rubbish bin, or are we just Plan B for those who cannot list at home.
The trick to getting any company listed in Hong Kong is simple these days; just secure so-called cornerstone investors to subscribe to about half your IPO shares. That's why some bankers joke that Hong Kong's IPO market looks more like a series of private placements these days.
An IPO should be a new beginning, not the end, for any responsible, listed company. You come to Hong Kong not to raise money easily here, but because you are committed to the stock market and your public shareholders.