US-China trade row a potential blow to the IPO ambitions of Hong Kong and Chinese markets

Deloitte also sees capital flows out of the region after US tax reforms and rate rises as risks to IPOs, but says listing rule reforms in Hong Kong and mainland China should increase the appeal of their exchanges

PUBLISHED : Tuesday, 03 April, 2018, 7:01pm
UPDATED : Wednesday, 04 April, 2018, 4:01pm

An escalating US-China trade dispute could be bad news for the initial public share offering ambitions of Hong Kong and mainland Chinese exchanges as companies would be less willing to consider a listing if the markets became volatile, according to accounting and consultancy firm Deloitte.

It added that US tax reform plans and interest rate increases by the Federal Reserve could spur a movement of capital away from Asia, another risk factor for markets.

“The escalating trade war between the US and China will cause continuous market volatility, which will seriously impact big firms’ willingness to publicly sell their shares,” said Edward Au, co-leader of the national public offering group at Deloitte China, at a briefing in Hong Kong on Tuesday.

“The IPO window is especially important for big companies. They may consider delaying their plans if the capital market is volatile. This is a potential big threat to the IPO market [for the rest of the year].”

In the first quarter of this year, Hong Kong saw 64 IPOs raising a total of HK$24.4 billion (US$3.1 billion), up 64 per cent and 84 per cent respectively from the same period a year earlier, Deloitte said.

On the Shanghai and Shenzhen exchanges in the same period, 37 IPOs raised a total of 40.7 billion yuan (US$6.5 billion), down 72 per cent and 42 per cent respectively year on year, as regulators tightened scrutiny to ensure the quality of listed companies.

The Shanghai exchange’s US$3.4 billion raised in the first quarter ranked it fourth behind the New York Stock Exchange, Germany’s Frankfurt market and the Nasdaq. Hong Kong was ranked fifth.

Still, Deloitte said new listing rules to come into effect in both Hong Kong and mainland China are likely to help their appeal to companies considering a listing.

“Hong Kong and China are both likely to implement IPO rule changes in the second half, which should provide a comprehensive set of listing choices for Chinese companies, including foreign-listed Chinese companies and tech unicorns currently considering IPOs,” said Au.

“The two markets’ new IPO rules will complement each and increase the region’s appeal as a whole.”

He said Deloitte maintained its earlier estimate that Hong Kong will see 150 to 160 IPOs in 2018, with a total fundraising amount of between HK$160 billion and HK$190 billion, up 24 per cent to 48 per cent from 2017. The city is likely to retain its spot as one of the world’s top three IPO markets this year.

Mainland China exchanges meanwhile could attract 180 to 240 IPOs in 2018, with 170 billion yuan to 200 billion yuan to be raised. The total estimated IPO value reflects a drop of between 13 per cent and 26 per cent from 2017, as Chinese regulators are expected to continue tightening of their scrutiny to ensure the quality of listed companies, Au added.

He anticipated more medium-sized firms in the internet technology, biotech, consumer and education sectors would list in Hong Kong in the second half.

In 2017, Shanghai and Hong Kong were the second and third top global IPO markets behind New York.

Expanded listing reforms in progress, says HKEX chairman

Hong Kong’s new listing rules include allowing companies with dual-class share structures to list and accepting the listings of biotech firms which have not yet turned a profit, as well as making it easier for innovative Chinese companies to have a secondary listing in Hong Kong.

China, meanwhile, has unveiled a plan to lure foreign-listed technology firms, with a proposed trial programme of Chinese depositary receipts for companies with a current market value overseas of more than 200 billion yuan.