Chinese investors’ access to Hong Kong’s IPO market gets added boost by the Aramco factor

PUBLISHED : Tuesday, 05 September, 2017, 8:01pm
UPDATED : Tuesday, 05 September, 2017, 11:06pm

A proposal by Hong Kong and mainland China’s stock exchanges to let investors partake in initial public offerings in each other’s markets has been given an added impetus by the prospect of attracting the US$2 trillion Saudi Aramco to raise funds in the city.

Hong Kong is one of several global equity bourses including New York, London, Tokyo, Toronto and Singapore contending to be the staging ground for Aramco’s IPO, estimated to be US$100 billion in size. The proposal, known as the “Primary Equity Connect,” would let investors from China’s US$7.6 trillion capital market gain access to the Aramco IPO through Hong Kong, increasing the city’s attractiveness as a place for raising capital.

From China’s side, Aramco listing in Hong Kong can also provide a “natural hedge” for domestic investors against the oil price volatility, said Charles Li Xiaojia, chief executive of Hong Kong Exchanges & Clearing (HKEX), the exchange operator.

The “primary equity connect” and the Aramco listing in Hong Kong can be a successful combination, as both sides are able to benefit from it, Li said during a conference in the city. “It’s a win-win situation,” he said.

Li didn’t specify on the timetable of the launch of primary equity connect, but said the exchange has been in talks with relevant parties. “We never stop (the talks),” Li said.

Last year, Li said in his blog that the “Primary Equity Connect” is feasible from a technical perspective, but important work remains for regulators to iron out the right regulatory framework.

The connect plan is the latest piece of a process of fostering closer integration between Hong Kong’s equity market with mainland China.

HKEX has launched three of the so-called connect schemes since 2014 with Chinese markets to facilitate cross-border trading. These comprised the Shanghai-Hong Kong Stock Connect in 2014, the Shenzhen-Hong Kong Stock Connect in 2016, and the Bond Connect in July.

Read: What is the Bond Connect?

Aramco, owned and run by the government of Saudi Arabia, plans to sell up to 5 per cent of the oil company in a 2018 IPO in one or more international markets beyond the stock exchange in Riyadh.

Even listing only 5 per cent of the US$2 trillion company would lead to a US$100 billion IPO, the biggest ever in world history, and leagues ahead of Alibaba’s record US$25 billion flotation in 2014.

On Tuesday, Li also said the HKEX has finished the consultation on a new trading board and the conclusion could “hopefully” come out in the coming weeks.

The HKEX started a public consultation in June for establishing a so-called “third board”, after the current board and Growth Enterprise Market, aiming to lure more new economy listings.

The new board could allow companies ranging from internet start-ups to biotech firms with dual-class share structures to list in the city.

Li said the HKEX has received positive feedbacks about establishing the “third board”.

The exchange might launch a second round of consultation on details about listing rules, he added.

“Hong Kong needs to find new ways to lure new economy companies to stay competitive,” Li said.

The HKEX proposed in 2015 to allow dual-class shareholding companies to list in Hong Kong, but the Securities and Futures Commission rejected the proposal. Nonetheless, the commission said it supported public discussions of the new plan.

In February, Singapore’s stock exchange started a public consultation on introducing a dual-class share structure.

In 2014, Chinese e-commerce giant Alibaba Group Holding opted to list in New York as its corporate governance structure was refused in Hong Kong. It triggered a hot debate in Hong Kong on dual-class shares and how to balance the interests of founding shareholders and executives with investors’.

Alibaba owns the South China Morning Post.