| With Asian stocks tumbling, it is clear that the region is feeling the downward tug from the European debt crisis. The crisis has lowered market liquidity on a global scale, the effects of which have been felt by way of a ripple effect on almost every shore including the mainland. The net result? Companies are less active in seeking funds through listings.
But to what extent will this put Hong Kong in peril in terms of IPO listings? As far as markets go, Hong Kong sits at the apex as the world’s largest initial public offering market. There are two pivotal issues however which may topple Hong Kong’s crown. First as we have referenced, the new austerity mentality in Europe has caused a decrease in the number of listings both by foreign companies and by Chinese companies. Chinese firms accounted for approximately 30 percent of the total amount raised through IPOs for the first 10 months of 2011 according to an article in the South China Morning Post. This figure fell by a significant amount (approximately 43 percent) which whilst considerable, was not fatal to Hong Kong’s premier status. The second issue which may hurt Hong Kong however, is the recent announcement that the Shanghai Stock Exchange is readying itself to allow foreign companies to list in the near future. At present, China prohibits foreign companies from listing in the PRC, however a new international board which may be launched will allow foreign companies to sell their shares to mainland investors. The international board will be a distinct entity from the A-share market and more importantly, there will be a moratorium against foreigners trading on the mainland markets (meaning that the international board will be confined to trading by mainlanders only –a considerable restriction.) Whilst it is entirely plausible that many of the premium brands will want to list in Shanghai with the intention of extending their reach to the China market, whether it presents a preferable option is still open to debate. According to Senior Associate, Norman Hui of Eversheds, there is no major imminent threat of Hong Kong losing its premier status. In his view, “it is unlikely [that Shanghai will trump Hong Kong] given that Hong Kong has established an impressive record of flexibility and innovation while maintaining high listing standards. Given certain restrictions in the PRC including capital controls as well as the non-convertible nature of the RMB” it would appear that there are various reasons which militate against listing in China. Indeed the fact that the yuan is not fully convertible will likely pose real problems from the point of view of foreign companies given how freely convertible the Hong Kong dollar is. Jeffrey Maddox, a partner at Jones Day in Hong Kong who specialises in Asian capital market transactions takes a cautiously optimistic view. He comments that “Hong Kong will continue to be a global market for emerging market issuers, both from China and elsewhere and will continue to be competitive over the next 12–18 months with London and New York.” In his view we’re not quite at the cliff’s edge yet in terms of a “dramatic fall-off in listings.” However, for Hong Kong to remain competitive he warns that the city needs to continue “to refine its technical regulations and the vetting process needs to be streamlined.” This should be done to remove the time and cost delays associated with Hong Kong listings. When asked about the impact a drop-off may have on in-house counsel, Maddox states that they will likely need to step up their game given that “better legal teams will be needed for listed companies to provide creative and commercial advice.” With the HKEx and the Shanghai international board potentially locking horns in the future, Hong Kong still arguably stacks up very nicely on the corporate governance front, presenting an attractive option and possible first port of call for many international MNC’s who are familiar with the market. At the end of the day, despite Shanghai priming itself to become an international city by 2020, it remains to be seen whether Hong Kong will be de-throned. |
