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Hong Kong Finance Has a Security Blanket

Nisha Gopalan
·4-min read

(Bloomberg Opinion) -- China’s decision to impose a national security law on Hong Kong has spurred speculation of capital flight and an erosion of the city’s status as an international financial center. As a venue for share offerings, at least, the near-term future is looking bright. For that, the territory can thank worsening U.S.-China relations.

U.S.-listed Chinese technology companies are lining up to sell stock in Hong Kong, seeking refuge from an environment that has become increasingly less hospitable. Nasdaq-traded JD.com Inc. and NetEase Inc. are planning secondary listings in the city next month, following a trail blazed by Alibaba Group Holding Ltd. in November. Optimism that more companies will join them drove shares of Hong Kong’s exchange operator up more than 6% on Monday.

There’s every reason to expect these stock offerings to do well, and push Hong Kong back up the rankings of the world’s largest fundraising centers. So far this year, the city is the sixth-largest market by capital raised. It topped the table for the whole of 2019 when New York-listed Alibaba sold $13 billion of stock, underscoring the existence of a strong local investor base for China’s most successful companies.

The reception for Alibaba suggests that Asian institutional investors want to be able to trade China’s leading enterprises in their own time zone. JD and NetEase are also among the nation’s technology champions. Beijing-based JD competes with Alibaba in e-commerce, while Hangzhou-based NetEase is behind some of the most popular mobile games in China. Beyond these two, search-engine operator Baidu Inc. is considering delisting from Nasdaq and moving to an exchange nearer home, Reuters reported last week. The coronavirus has exacerbated tensions between Washington and Beijing, while scandals such as fabricated sales at Luckin Coffee Inc. have spurred politicians to push for tighter regulation, giving Chinese companies an incentive to list elsewhere.

Hong Kong is an obvious choice. The city burnished its appeal for U.S.-traded companies last week when the compiler of the city’s benchmark Hang Seng Index said it would change its rules to admit secondary listings and companies with dual-class share structures. Stocks that join the benchmark can expect inflows from passive investors such as exchange-traded funds that track the index.

Citigroup Inc. reckons that 23 of the 249 Chinese stocks traded in the U.S. meet Hong Kong’s criteria for a secondary listing, which require companies to have a market value of $5.2 billion or, alternatively, a combination of $129 million in annual sales and a $1.3 billion market cap. JD tops the group with a value of $73 billion.

An even more alluring prize would be inclusion of secondary listings in Hong Kong’s stock-trading links with the Shanghai and Shenzhen exchanges, which would enable mainland Chinese investors to buy these shares. Alibaba wasn’t included in the stock connect, to the disappointment of some investors. China’s government could yet decide to make this happen.

It’s a reminder that Beijing has levers at its disposal to help shore up Hong Kong’s economy and financial industry, which accounts for a fifth of the city’s gross domestic product — as it did after the SARS epidemic in 2003, when half a million people demonstrated against the Hong Kong government’s first, aborted attempt to introduce national security legislation.

Hong Kong Exchanges & Clearing Ltd. surged the most in 18 months Monday even as unrest returned to the city. Listing of American depositary receipts may double the exchange operator’s revenue, Morgan Stanley said. The Hang Seng Index, meanwhile, stabilized after slumping 5.6% on Friday.

An exodus of businesses, people and capital may yet imperil Hong Kong’s role as an international financial center. The IPO outlook suggests that, rather than a sudden demise, that’s likely to be a long drawn-out process.

This column does not necessarily reflect the opinion of the editorial board or 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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