Beijing’s overture to tech firms triggers a tug of war between mainland and Hong Kong bourses

Shanghai Stock Exchange officials say it has prepared a package of services aimed squarely at tempting ‘unicorns’, and has already visited a clutch of high-quality firms to pitch for their listings

PUBLISHED : Monday, 12 March, 2018, 7:31am
UPDATED : Monday, 12 March, 2018, 2:59pm

The scramble by mainland China’s two stock markets to lure foreign-funded technology firms is firmly back on track, as its financial regulators revisit their plan to create a fast track mechanism for share offerings by what many consider will be the profitmaking stars of the future.

But this time, their on-off-on-again plan – first revealed way back in 2001 – is set to have greater substance, say commentators, since the leadership is more determined than ever to inject some entrepreneurial vigour into the economy to drive long-term growth.

That will ratchet up the pressure on Hong Kong, as a tug of war over listing resources gradually takes the strain.

Shanghai Stock Exchange officials said in a statement over the weekend it has prepared a package of services aimed squarely at tempting “unicorns” – unlisted tech firms valued at more than US$1 billion – and has already visited to a clutch of high-quality companies, to pitch for their listing on the bourse.

“We have invited them to Shanghai, so they can gain first-hand experience (of our facilities and systems),” it said.

“We are also reaching out to help them overcome difficulties in accessing the capital markets,” it added, without casting a light on any actual names.

The mainland’s top securities regulators, including chairman of the China Securities Regulatory Commission (CSRC) Liu Shiyu, confirmed last week too that Beijing is rethinking its building of a mechanism to attract domestic technology firms, financed by foreign funds.

Hong Kong’s own securities regulator, the Securities and Futures Commission (SFC), and its stock exchange are also conducting the city’s largest listing reforms in decades, aimed at enhancing the bourse’s attractiveness to technology listings.

With IPO rules reboot, Hong Kong is primed for 2018’s big China technology listings

From June, large biotech companies, for instance, without strong revenue track records as well as more mainstream technology firms with dual-class shareholding structures will be allowed to list in the city.

That dual-class share structure, will allow shareholders – most of whom are founding members – to have more voting rights or enjoy more dividends, and is favoured by many tech founders as the majority hold minority stakes but still want to maintain control.

In 2014, Alibaba Group Holding (which owns the South China Morning Post) chose to list in New York after Hong Kong’s refusal to allow a dual-class structure.

The SFC quickly recognised the competitive pressures this put the city under in attracting listings by new-economy companies, and threw its weight last December behind its own proposed listing reforms, that will allow companies with multiple classes of shares to list in Hong Kong.

“Some technology firms being courted by both exchanges in Hong Kong and the mainland have chosen to list A-shares only – yuan-denominated shares bought and traded on the Shanghai and Shenzhen stock exchanges – because of the domestic market’s higher valuations and the convenience,” said Cao Hua, a partner at private equity group Unity Asset Management.

“Expect to this see-saw game between the two markets[Hong Kong and the mainland] intensifying in coming years.”

In China, a would-be, fast track listing mechanism proposed to be launched in 2015 was seen as a winning formula which underlined its efforts to set up a dedicated board for emerging industries.

But that was put on ice after a summer stock market rout exacerbated regulator worries about a further slide in key economic indicators.

That board was particularly designed to welcome relistings by privatised Chinese tech firms, which had previously traded in New York.

Will the introduction of dual-class shares in Hong Kong boost Chinese tech shares listed in US?

Last week, Foxconn Industrial Internet – a unit of the world’s largest contract manufacturer whose products include Apple’s iPhones – received the go-ahead from the CSRC to launch an initial public offering (IPO) in Shanghai, just five short weeks after it filed an application.

The green light granted to the 27 billion yuan (US$4.27 billion) fundraising was the clearest sign yet that the CSRC is now prioritising technology IPOs as a way of bolstering the country’s levels of technical innovation – a key component of the Chinese leadership’s attempt to create an economy reliant on slower, but more sustainable growth.

Most of the country’s promising start-ups have been backed in the past by foreign private equity and venture capital funds, under the so-called VIE (variable interest entity) structure, and could only list in markets such as Hong Kong and New York.

A VIE structure allows founders and investment funds to set up offshore vehicles which can sign contracts with Chinese firms, giving the latter effective control of the resultant offshore vehicle.

To woo VIE firms into an A-share listing, regulators now need to amend securities and corporate laws and revise domestic listing rules, as direct investment in China’s A-share market is off-limits to foreign companies.

The Shanghai exchange says it has already started putting together a blueprint to attract IPOs by foreign companies, particularly “red chips”, or mainland companies incorporated and listed in Hong Kong, but with controlling Chinese shareholders.

Two Shanghai exchange officials said its fresh initiative to attract technology-leading IPOs has the solid backing of the Chinese leadership, further north in Beijing.

Top of their agenda is clearly creating the next generation of tech behemoths on a par with established leaders such as Alibaba and Hong Kong-listed Tencent Holdings, with the full backing of the domestic capital market.

And with the Shanghai exchange beating its Hong Kong counterpart in terms of value for IPOs for the first time last year, the signs are strong that more investors could well take the bait.