Hong Kong's stock exchange may turn out to be the winner in the escalating tension between the US and Chinese capital markets, after the United States Senate passed an unprecedented bill to fence off Wall Street from Chinese companies.
The bill, which received bipartisan, unanimous support in the Senate, requires fundraising applicants to prove that they are not owned or controlled by foreign governments before they can list on a US bourse, and require them to submit audits to the US Public Company Accounting Oversight Board (PCAOB). While the bill applies to any non-US company, Louisiana Republican Senator John Kennedy " one of the bill's sponsors " said it's aimed at China, intended "to stop them from cheating" on US exchanges.
The bill adds to changes proposed by the Nasdaq to raise the bar on applicants for initial public offerings (IPOs), where the minimum fundraising will be increased to US$25 million, or at least a quarter of the company's value. The additional barriers on Wall Street may redirect more fundraising applications towards Hong Kong, Asia's third deepest capital pool, helping the city leap frog New York as the global hub for IPOs, bankers said.
"Chinese companies with smaller market capitalisation have tended to list in the US due to better liquidity" in the world's largest and deepest capital market, said BNP Paribas' Asia head of equity capital markets Christopher Wong. "With tighter listing requirement by Nasdaq, and increasing US-China tension, the Hong Kong stock exchange would stand to be the beneficiary."
This could help Hong Kong catch up in the global IPO ranking, after having been at the worldwide top in seven of the past 10 years. Hong Kong was ranked fifth globally in the first quarter, with 37 companies raising a combined HK$14.1 billion, languishing after the 21 IPOs on Nasdaq that raised HK$42.4 billion (US$5.5 billion), according to Deloitte's data.
Shares of Hong Kong Exchanges & Clearing Limited (HKEX), the exchange operator that is itself listed on the city's bourse, advanced for a fifth day, jumping by as much as 2.9 per cent to an intraday high of HK$273.40, their highest level in almost four months.
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The heightened scrutiny of Chinese companies follows the order given last week to kick out Luckin Coffee for accounting fraud, the first expulsion of a China-domiciled listing from Nasdaq. The Xiamen-based company, which has touted itself as the Starbucks of China, admitted on April 1 that 2.2 billion yuan (US$310 million of its sales had been fabricated.
Luckin Coffee's scandal underscored the distrust of the US financial markets of Chinese companies, as they lack on-the-ground access to the companies' books. The non-profit PCAOB, which oversees the audits of US-listed public companies, has singled out four markets " Belgium, China, France and Hong Kong " whose accounts are restricted to US auditors.
While Belgium and France each had bilateral agreements " the French agreement lapsed in December and is pending a renewal " with the US that allow American auditors access, it's the Chinese restriction that rankles, especially since Chinese companies had been making greater inroads on Wall Street. The US$25 billion IPO in 2014 by this newspaper's owner Alibaba Group Holding in New York still holds the record for the most amount of money raised in an American exchange.
Shares of Luckin Coffee, which said it would appeal Nasdaq's expulsion order, plunged by 35.7 per cent overnight as shareholders rushed for the exit. Luckin Coffee's major shareholders included Singapore's GIC and the Qatar Investment Authority, according to filings in January and February.
Between 2018 and May this year, just 2.3 per cent of the overall IPO proceeds raised by Chinese companies were from deals below US$25 million, or about a third of the 52 IPOs from Chinese issuers, data from Refinitiv shows. Hence, the impact from this proposed listing rule would unlikely put a big dent in the overall proceeds raised by Chinese firms, bankers said.
To be sure, a US$25 million minimum is not quite as onerous as it looks, given the higher valuations that Nasdaq applicants can get, compared with other markets. The US exchange trades at 36.8 times current earnings, more than three times higher than the 10.1 times on the Hang Seng Index, and 8.1 times on the Hang Seng China Enterprises Index.
As at Tuesday, the Nasdaq Composite has been steadily gaining nearly 34 per cent since this year's low seen at 6879.5 reached on March 20th. Despite the coronavirus, there is still liquidity in the capital market chasing after new stocks as more central banks globally have launched asset buying programmes and lowered interest rates close to zero.
"Given the US stock market has risen that much, the price-to-earning multiples that these new issuers could be valued at in the US would likely be higher," assuming that these Chinese companies' revenue could return to pre-coronavirus level, said Jeffrey Sun, a partner in Shanghai at the law firm Orrick.
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Still, there are now more options available for Chinese companies that need to raise funds. China's financial regulators have changed the listing rules on the Star market in Shanghai and on the ChiNext exchange in Shenzhen to let pre-revenue biotech companies raise funds. Chinese regulators also pledged last week to speed up their approvals for applicants to raise funds in London, reviving the use of a long-forgotten transborder fundraising channel called the Shanghai-London Stock Connect, that had so far hosted two listings.
Hong Kong also stepped up, with the compiler of the Hang Seng stock index agreeing last week to
add companies with weighted voting rights and secondary listed from the Greater China region into its benchmark. Three new economy stocks with weighted voting rights " e-commerce giant Alibaba, food-to-ticket order platform Meituan Dianping and smartphone giant Xiaomi " could be included in the HSI in the review slated for August, China Renaissance said this week.
This has all been made possible by reforms made in the Hong Kong listing rules in 2018 that enable for companies with weighted voting rights to list in Hong Kong, which led to Alibaba's US$12.9 billion mega IPO last November. That was followed by reports that JD.com and NetEase.com are also planning secondary listings in Hong Kong.
"Hong Kong has always played second fiddle when it comes to listing of Chinese companies in the new economy and biotech sectors, with the US always being on forefront. But over the last few years HK has made good progress in encouraging listing by these companies through a series of reforms," said Wong.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.