China bars access to offshore tech darlings in unexpected move to halt capital flight as markets fall
The temporary exclusion of companies with so-called weighted voting rights (WVRs) could hurt Xiaomi and other tech start-ups
China’s equities bourses will temporarily bar mainland Chinese investors from trading companies with multiple classes of stocks, in a move to prevent domestic capital from fleeing the country’s bear market to Xiaomi and other offshore-listed darlings of global finance.
Foreign companies, stapled securities and stocks with so-called weighted voting rights (WVRs) listed in Hong Kong will be temporarily excluded from the pool of stocks that mainland Chinese investors are allowed to trade in, under the so-called Stock Connect programmes, according to a statement on the Shanghai exchange.
“Many [Chinese] investors have said that still lack a proper understanding of these new equity products, especially with regards to the operational and financial systems of overseas companies,” the two bourses said in their joint statement.
The surprise announcement, coming a week after Xiaomi became the first company with multiple classes of stock to trade in Hong Kong under new listing rules, would deny investors in mainland China - where Xiaomi earns most of its sales - the chance to partake in the earnings of the world’s fourth-largest smartphone maker.
Chinese regulators have good reason for concerned, as Shanghai’s benchmark Composite Index has slumped 23 per cent since January amid the steady drumbeat of the trade war between the US and China. The Shenzhen Composite Index has fallen 22 per cent over the same period, landing Asia’s largest combined equity market in bear territory.
“Considering that the trade war is expected to further escalate, the sluggish performance of the A-shares will drag on for a while,” said Shen Meng, executive director with investment bank Chanson & Co. in Beijing. “China wants to prevent more domestic currency from flowing from the stock exchanges at home to overseas markets, including Hong Kong.”
The Stock Connect programme, which started in 2014 by letting overseas investors trade stocks on the Shanghai exchange, was followed two years later by a similar programme for Shenzhen-listed stocks.
Responding to the announcement by the Chinese exchanges, the Hong Kong market operator sounded a defiant note.
“Prior to the listing of the first company with WVRs in Hong Kong, [the market operator] tried to reach a consensus with the mainland exchanges on the inclusion of the companies in the list of eligible securities” for mainland Chinese investors to buy and sell in, the Hong Kong Exchanges and Clearings Limited (HKEX) said in a statement.
Xiaomi’s shares began trading on July 9 in Hong Kong, after an initial public offering that was trimmed by nearly half because of the unfolding trade war between the world’s two largest economies. The smartphone maker had also pushed back against the overtures by the Chinese securities regulator to sell depositary receipts (CDRs), which would allow domestic Chinese investors access to overseas stocks.
“This decision will be likely to affect the liquidity of H-shares, reducing the number of firms Chinese investors could put money in,” said Chanson’s Shen. “The most profound implication could be to cast a shadow over the Shanghai and Shenzhen Stock Connect schemes, which used to brag about their interconnection of investors in the two places.”
When the Shanghai-Hong Kong Stock Connect was first started, more capital flowed to the Chinese exchange than the southbound funds, a situation that was only reversed in 2015 when more mainland investors sought to park their investments offshore to escape a deteriorating currency.
Since their implementation, as much as 11.67 trillion yuan (US$1.74 trillion) of transactions had been recorded, according to the Shanghai bourse statement. A combined 779 stocks are now tradeable by investors on both sides, an increase of 14 oer cent over four years.
“Our key interest is to ensure that the market remains fully informed of any material developments in relation to Stock Connect and that trading is orderly,” said the Hong Kong Securities and Futures Commission’s Chairman Carlson Tong, in response to a query by the South China Morning Post. “We will monitor the market closely and work with the mainland regulator to develop essential regulatory structures to enable both markets to expand and broaden their connectivity.”
As the first dual-class stock to be listed in Hong Kong, Xiaomi turned around from its sputtering debut into four consecutive days of gains, becoming one of the most valuable stocks on the stock exchange. The stock was added to the widely tracked FTSE China A50 Index and the Hang Seng Composite Index, which could allow mainland investors to buy the stock via the Stock Connect scheme.
The China Securities Regulatory Commission said in April that daily southbound and northbound quotas for each of the Shanghai-Hong Kong and Shenzhen-Hong Kong connects will be quadrupled starting from May 1. They will rise to 42 billion yuan from 10.5 billion, and 52 billion yuan from 13 billion, respectively.
The move was among a slew of measures to open up of China’s financial sector to foreign investment, unveiled by Yi Gang, the newly appointed governor of the People’s Bank of China.
“Stock Connect is an important part of the opening up of the mainland’s capital market,” the HKJEX said. “HKEX will continue to maintain close communications with the mainland regulators and exchanges with an aim to confirm the timetable to including WVR companies [in the eligible list] and to provide mainland investors with a convenient channel to invest in new economy companies.”
With additional reporting by Enoch Yiu in Hong Kong