Hong Kong as an Emerging IPO Center and the International Dimension of its Stock Market

Abstract

The Hong Kong stock market is the third-largest exchange by market capitalization and the second-largest by number of total listings in Asia-Pacific. It attracts investors locally, from within, and from outside Asia. Overseas investors account for approximately 40% of overall participation in the Hong Kong securities market since 2000. This thriving market lures numerous Chinese companies to launch their IPOs in it, and thereby became the top IPO fundraising center in 2009. Despite the negative impact from the debt crisis, the future development of the market seems promising, as the amount of IPOs fundraised thus far this year is about $3.7 billion and several firms are ready to float in Hong Kong later in the year.But this is only what a bird’s eyes view reveals. Drilling deeper, a different picture emerges, one where the Hong Kong stock market, rather global as it is in its investor base, is revealed as not being very international in its listings, its longer-term position being therefore less than very firm as other exchanges in the region continue to outpace it in key respects and as the mainland’s economy and policies continue to develop and open up. Three central issue areas are particularly worth focusing on:Composition of stock market participants. Foreign participation is high in Hong Kong, as is true also in most East Asian stock markets. This both leads to and results from the region having efficient platform and information systems, well trained and experienced professionals, and good regulatory frameworks. The Tokyo Stock Exchange, largest in the region and one of the largest in the world, also has the most international investor base among the region’s major exchanges—dominated by foreign investors to the tune of a 56% share. Hong Kong, while somewhat behind on this indicator, is also rather international in its investor base, with overseas investors’ participation in Hong Kong standing at a high 40% which has been stable over time. The Korean stock market has 32.6% investors from overseas. Foreign listings. Despite partial exceptions provided by the Australian and Singapore stock exchanges, Asian stock exchanges tend to have very few foreign listings compared to their counterparts in Europe and North America. Out of the 1321 companies listed on the Hong Kong Exchange by April 2010, 253 companies are from China and only 11 companies are from overseas. This demonstrates the limited external dimension of the Hong Kong stock exchange. For Hong Kong to transit to become a truly international financial center in the medium- or long-term, its stock market needs to have more foreign listings, which in turn requires modifications on primary listing, secondary listing, post listing and international listing rules.Resources companies. A recent trend in the resources sector has been the migration of new listings from producer countries’ to consumer countries’ exchanges—or more specifically to Hong Kong as the gateway to China. Being part of China, the world’s second largest resources consumption country, Hong Kong has thus far been successful in positioning itself as an emerging resources center in East Asia. Initially serving as a venue for Chinese resources companies to raise funds and for foreign investors to tap into the Chinese resources sector, two newcomer resource companies began to float in Hong Kong this January: UC Rusal from Russia and Canadian-based SouthGobi. The resources sector is a niche Hong Kong should seek t establish and develop, as Hong Kong has great potential to be a global mining financing center. But a complex sector it is as resource companies often have a high risk profile: indeed, out of concerns over investor protection and the lack of policies governing the junior resources sector, early-stage exploration companies are not allowed to list in Hong Kong unless they prove the existence of exploitable natural resource reserves and provide a clear production plan. But the potential the sector offers is huge, and with the Hong Kong stock market dominated by financial and property companies, participation from resources companies would help diversify it. Current listing rules for resources companies have to be updated and modernized and the sector also needs assistance from the local authority to conduct more marketing activities.