Investors bet on HK IPOs despite China’s new overseas listing rules
Despite China’s new IPO rules categorising Hong Kong as an overseas market, institutional investors believe regulators will extend favourable terms to Chinese companies interested in listing their shares in Hong Kong.
“[The new rules are] meant more to bring about stability and clarity through more transparent processes, guidance and frameworks, in order to avoid seeing any repeat of the turbulences of last year, as opposed to hinting at any new rounds of regulatory crackdowns,” said Martin Hennecke, head of Asia investment advisory and communications at St. James’s Place.
“In fact, I would suggest that the frequent recent emphasis by government officials on stability and growth for this year, coupled with concrete monetary easing actions being taken, might be hopeful indicators for calmer waters ahead, and similarly for overseas IPOs, uncertainties are being removed,” Hennecke told AsianInvestor.
In late December, the China Securities Regulatory Commission (CSRC) unveiled draft rules for onshore companies interested in conducting their IPOs overseas. A public consultation on the draft rules ended on January 23.
For the first time, new rules stipulate that the CSRC will regulate all sorts of overseas listings, including “red chips” - shares of companies that are incorporated offshore but operate most of their business on the Chinese mainland.
In a recent interview with CNBC, Shen Bing, director-general of CSRC’s international affairs department, noted that the new rules will also apply to Hong Kong.
At the same time, however, Shen expressed concern at the recent slowdown in offshore IPOs by Chinese companies: “We hope companies would make full use of these new rules, and resume their listing in any overseas market.”
FAVOURED MARKET
“More specifically with regards to Hong Kong IPO versus US IPO, while the new listing rules are said to be applicable to both jurisdictions, I believe that HK IPO might still be viewed somewhat more favourably and receive more support by the central government, whether formally or informally, as Hong Kong’s cooperation with mainland regulators is more established and geopolitical tensions between China and the US continue to linger,” Hennecke said.
Hong Kong's weak stock market in 2021 has continued into this year, with stocks trading at about a 28% discount to A-shares. Hennecke said investors should consider this when comparing companies with dual listings in both Hong Kong and the Chinese mainland.
“I can’t see the US regulators reversing their position and allowing more Chinese companies to go to the US. I don't see that at all. So, I think this is a structural trend happening and it has to be beneficial to the Hong Kong stock exchange and to some of the exchanges in China,” said Raymond Chan, chief investment officer for equity Asia Pacific at Allianz Global Investors during a recent webinar.
CLARIFICATION NEEDED
However, the new draft rules do not make it clear - and Shen did not confirm this in his CNBC interview - whether the rules will be less stringent for Hong Kong IPOs than other offshore markets such as the US or the UK.
Another potential obstacle to overseas IPOs arose on February 15 when the central government released the Cybersecurity Review Measures. Since then, the Cyberspace Administration of China (CAC) has started to review applications from operators of online platforms that hold the personal data of more than one million users and plan to list abroad.
It is unclear, however, whether all companies will need to go through a review before applying to the CSRC for an overseas IPO review.
“It will be good if we can see from the final version of the CSRC IPO filing requirement that for companies in the technology, media, and telecom (TMT) industry, whether they need to file a consent or endorsement issued by CAC on cybersecurity review,” said Billy Au, corporate and securities partner at Mayer Brown, a law firm.
Meanwhile, for certain industries under China's negative list for foreign investment, a single foreign investor cannot invest more than 10%, or in aggregate all foreign investors cannot own more than 30% of the shares of a Chinese company. Such requirements can limit variable interest entity (VIE) companies when raising international money.
Previously, firms could use this structure to issue shares via offshore shell companies to avoid domestic regulation.
China's update of its negative list, which for the first time set out some rules for overseas IPOs and share trading, took effect from January 1 this year. However, the update doesn't clarify how existing companies that use a VIE structure, such as ride-hailing platform Didi, should approach an overseas IPO.
Au said market participants hope this detail can be streamlined with the CSRC IPO filing requirement as to whether it requires an endorsement or clarification on foreign investment limit for VIE listings.
Now that the Winter Olympics has ended and the Two Sessions are approaching, Au estimated the final overseas IPO rules could come out as early as second quarter.
SPECIAL TREATMENT
Au said clients and market professionals would be happy if Chinese regulators treated IPO applicants less stringently, particularly regarding VIE listings and cybersecurity reviews, than other foreign stock exchanges.
“I honestly believe that there should be some better treatment for Hong Kong listings,” Au told AsianInvestor, noting that from a cybersecurity point of view, Hong Kong is part of China.
“Also, if Hong Kong is treated the same as foreign countries such as the US, IPO applicants would have no particular incentives to get listed in Hong Kong especially for the new economy business. Comparatively, US investors in new economy sectors are more sophisticated, and companies can get higher valuations.”
“The central government still wants Hong Kong to be a competitive financial centre,” Au added.
“For any stock market to do better, we need more listings. To welcome more Chinese companies that can come in and be listed would strengthen the coverage that Hong Kong has in the region. So, I think for cementing HK’s positions as an international financial sector, [more IPOs] will be positive,” said Christiaan Tuntono, Asia Pacific senior economist, Allianz Global Investors, in a recent webinar.