Exclusive | HKEX’s Charles Li wants to create another wave of mega IPOs in Hong Kong to stay ahead of Nasdaq in next market reforms

A large number of US-listed companies cannot list in Hong Kong unless rules relaxed further, Li says
Corporate shareholders are not allowed to own more voting rights than others in Hong Kong, which is why Tencent Music is barred under current rules

HKEX

Alison Tudor-AckroydandEnoch Yiu

Published: 9:15am, 31 Aug 2020

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Hong Kong’s stock market operator is keen to create another wave of mega stock offerings by mainland China’s new-economy companies in the city by further tweaking its listing rules, its chief Charles Li Xiaojia said.

The idea, if adopted, will enable the likes of Tencent Music and online learning company Youdao to make their so-called “homecoming” stock offerings, according to Hong Kong Exchanges and Clearing (HKEX), helping to entrench Hong Kong the primary fundraising hub in the region along with Shanghai.

“There are companies with hundreds of billions of market cap that want to be back here, but probably are not going to be able to come back unless we make those changes,” Li said during a webinar conducted by the South China Morning Post on Friday. Listing reforms should go further, he added.

HKEX issued a consultation paper in January to solicit a response to the idea of enabling the initial public offerings (IPOs) of companies whose corporate shareholders own more voting rights than other investors. The feedback has been positive from the broader market. US and Singapore bourses do not prohibit such corporate structures.

Chief Executive of Hong Kong Exchanges and Clearing (HKEX) Charles Li. Photo: Reuters

HKEX amended its listing rules in April 2018 by allowing companies with multiple classes of shares with individual-controlled voting rights to sell shares in Hong Kong. The reform, its biggest in decades, led to the current wave of secondary listings led by this newspaper owner’s Alibaba Group Holding and JD.com, among others.

“We need to continue to ask ourselves the question: “Do we want to carry on further?” Li said during the webinar held in conjunction with the China internet Report published by SCMP Research. “I personally do, but again this effort needs to have all the key stakeholders to be comfortable.”

Li, however, may need to accelerate the proposed reforms if he wants to accomplish the feat within his 12-year career at the exchange. The 59-year old former chairman of JPMorgan China unit announced in May that he would step down in October 2021.

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HKEX’s efforts have rewarded investors with a 50 per cent gain in its stock price this year, while the Hang Seng Index languished with a 9.8 per cent loss. Over a five-year period, the stock has risen 116 per cent, outpacing the benchmark index by more than five times.

The Hong Kong stock exchange has been the top listing destination globally in seven of the past 11 years, however, it is still missing out on bumper offerings to New York by some of China’s most innovative new companies such as electric vehicle maker Xpeng and KE Holdings, better known at home as Beike Zhaofang.

Chinese entrepreneurs are still looking to list in the US because of its deep capital markets despite rising US-China tension, according ti Beike’s chief executive Stanley Peng Yongdong said earlier this month.

A working group of top US regulators recommended this month that foreign issuers, including Chinese firms, be delisted from American bourses if they do not provide access to the working papers for their audits for review by January 2022. China was the only non-cooperating jurisdiction mentioned by name in the group’s report.

The US State Department asked American colleges and universities in an August 18 letter to sell their holdings of Chinese companies in their endowments, warning those companies could face a “wholesale delisting” from American stock exchanges by the end of next year. The Trump administration has also tried to discourage pension funds and other US investment funds from investing in Chinese firms.

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Since the HKEX listing overhaul in 2018, some 99 new-economy companies and biotech firms have listed in Hong Kong, raising HK$390.5 billion of proceeds. These companies account for 23 per cent of Hong Kong’s market capitalisation and 15 per cent of average daily turnover.

A total of 64 companies raised a combined HK$92.8 billion in Hong Kong in the first half of this year, an increase of 29 per cent from last year, making Hong Kong the world’s second most popular listing destination.

About 42 per cent of all US-listed mainland tech firms have weighted voting rights (WVR) structures while 84 per cent of the 50 biggest technology unicorns in mainland China have corporate shareholders, HKEX said in its consultation paper.

Tencent Music, NetEase-backed Youdao, and live-streaming company Huya are among 38 US-listed mainland Chinese companies that do not qualify to list in Hong Kong as they have corporate shareholders with a WVR structure. US and Singapore bourses do not prohibit companies with such structures from doing IPOs.

The Financial Services Development Council, a government think tank, supported the HKEX proposal but Hong Kong Investment Funds Association wants to have more safeguards for investors.

The exchange should also consider lowering the minimum market cap for a company with WVR to list in Hong Kong as the current HK$40 billion is too high, says Christopher Cheung Wah-fung, a lawmaker for the financial services sector in Hong Kong and chairman of Hong Kong-based broker Christfund Securities.

“If the exchange can lower the bar to HK$20 billion, it will attract more tech firms to list,” Cheung added.

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