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HKEX is unlikely to lose ground to SGX

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By Jonathan Breen
13 Mar 2018

The Singapore Exchange is firing shots at the Hong Kong Stock Exchange once again to lure IPO-hopefuls, this time over the city’s ever closer political relationship with China. But Hong Kong can boast some clear advantages over its rival.

When promoting the SGX last week, its head of equities and fixed income Chew Sutat made a point of highlighting that Singapore is not China. His pitch for firms looking to list is clear: Singapore is a good listing alternative for Chinese and Hong Kong companies because it is not China and so not under its thumb.

His argument comes at a time of increasing political tensions between Hong Kong and the mainland, which some market watchers fear is threatening the legal independence and semi-autonomous relationship that has made the city so attractive to international finance. If things get rocky, it would only be natural for firms to look at other avenues to raise new equity.

But it’s not quite that clear-cut as saying that political tensions and pressure from Beijing are good or bad for the Hong Kong ECM market. There are elements of both.

For starters, Hong Kong’s value proposition is not going to change and it will remain a huge draw for Chinese issuers, particularly those looking to do business across the border. The bourse has repeatedly been among the busiest IPO markets in the world, offering a vast investor base and increasing access to Chinese capital. It has also firmly cemented its status as Asia’s financial hub.

Singapore, in comparison, is a much smaller market. It has been the hub for Asean issuers and the de facto home for real estate investment trust IPOs, but it needs more primary equity business. Lack of chunky deals in primary has made secondary trading volumes on the exchange lacklustre — a frequent complaint among ECM bankers. So it makes sense that it is trying to attract Chinese companies that have largely been heading to Hong Kong or New York to list.

SGX already has a number of Chinese firms listed on its bourse, known as S-chip stocks. But the majority of those names listed nearly a decade ago. And in recent years the trend has reversed, with an increasing number of S-chips de-listing. The bourse has also had trouble winning over local issuers, such as gaming company Razer, which last year opted to leave its home market and list on the HKEX.

Unsurprisingly, the SGX has been criticised for not having a clear game plan. But it has been upping its game, taking a big step forward last year when it passed a proposition to allow dual-class shares — a favourite with technology firms that like to keep control over their long term vision.

That, however, is unlikely to much make much of a difference.

The HKEX has matched the move and will also start allowing dual-class share structures from later this year. The proposal is expected to not only attract new economy companies from the mainland, but is also targeted at getting Chinese champions such as e-commerce firm Alibaba Group Holdings, which is listed in the US, to have a secondary listing in Hong Kong.  

China itself is keen to host technology IPOs, with local publication Caixin saying at the start of March that the regulators may allow offshore Chinese listed companies to sell depositary receipts in the mainland — heating up competition between the bourses.

Where Hong Kong’s status could begin to suffer, however, is on the buy-side. If China becomes more involved in the city and the local market, investors are likely to grow wary about protection. There are already doubts, for example, over whether a Chinese state-linked company would be held accountable for any digression in the same way as other listed firms in Hong Kong, leaving the fate of investors tied to political influence. That is still far-fetched, of course, but the fact that concerns are already building suggests how closely investors are watching developments between the city and China.

In the short term, the competition may be on but Singapore needs to change its tack if it wants to attract more business to its primary market, as the appeal of a Hong Kong listing is not going to fade anytime soon.

The HKEX can probably rest easy — the Lion City is unlikely to roar just yet.

By Jonathan Breen
13 Mar 2018