(Bloomberg Opinion) -- The decision to exclude shares of China's biggest e-commerce company from a cross-border trading link is a blow to Hong Kong. Is it a punishment, or simple self-interest at work? The answer matters, both for the city’s exchange and for Alibaba Group Holding Ltd.
Alibaba can’t be included in the stock connect program linking Hong Kong with the Shanghai and Shenzhen exchanges at present, Bloomberg News reported Tuesday, citing people familiar with the matter. China’s securities regulator has yet to agree to rule changes proposed by Hong Kong Stock Exchanges & Clearing Ltd. that would allow the internet company to participate, one of the people was cited as saying.
Granted, the Jack Ma-founded internet giant doesn’t qualify under the stock connect program’s existing arrangements, which exclude companies that have secondary listings with weighted voting rights. These were already in place before New York-listed Alibaba raised $13 billion selling shares in Hong Kong late last year.
But exceptions have already been made. In October, China allowed companies with dual-class shares to join the connect, giving investors in the mainland access to Hong Kong-listed technology companies Xiaomi Corp. and Meituan Dianping. Rules can be changed when there is the desire to do so.
Clearly, that was the expectation among investors here. The notice on dual-class shares was posted by the Shanghai and Shenzhen exchanges in mid-October and took effect Oct. 28. Three days later, Alibaba was reported to be planning its secondary listing in Hong Kong the following month. The shares started trading Nov. 26.
Investors in Alibaba’s Hong Kong stock will have a right to feel short-changed if the shares lose steam as a result. They dropped as much as 2.5% after the Bloomberg News story published, before recovering to close little changed. Alibaba has rallied more than 20% since its debut in Hong Kong, at least partly on anticipation that the stock will draw a wall of money from mainland Chinese investors who wouldn’t otherwise be able to buy.
The lack of support for Alibaba to join the stock connect is a severe blow to Hong Kong’s aspirations of marketing itself as the offshore listing venue of choice for Chinese technology companies, in an environment where the U.S. has become increasingly inhospitable and businesses are considering their options. Trip.com Group Ltd. and Netease Inc. are among U.S.-listed Chinese enterprises that are said to be looking at listing in Hong Kong. Bankers have talked of pitching other names including JD.com Inc. and Baidu Inc.
The prospect of acquiring an enthusiastic mainland investor base that would help to buoy valuations is a key selling point for those who might be tempted to decamp from a U.S. exchange. If Alibaba — a marquee name with a $578 billion market capitalization — can’t get the nod, what’s the hope for any of the others?
More worrying for Hong Kong is what the reluctance may say about China’s support for the city, as it contemplates the hit to its own economy from the coronavirus epidemic. HKEX, after all, is a competitor as well as a partner with the Shanghai and Shenzhen exchanges. If Hong Kong becomes too attractive a venue for China’s leading companies, that may hold back development of the mainland’s markets.
In 2018, Hong Kong relaxed its listing rules to admit unprofitable technology companies, competing with the U.S. and making the exchange even more alluring to Chinese hopefuls than the Shanghai and Shenzhen markets. In turn, Shanghai introduced the tech-focused Star Board in July, a Chinese answer to the Nasdaq that accepts money-losing companies with weighted voting rights. After a lively start, the board’s performance has been underwhelming. It has drawn few big names and has thin turnover.
All may not be lost. Smartphone maker Xiaomi had been public in Hong Kong for 15 months before it joined the connect, while food-delivery app Meituan had to wait 13 months. HKEX and Alibaba will have to hope this is the slow arm of bureaucracy rather than the cold shoulder.
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This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
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