Hong Kong’s stock market is on track for its worst quarter for new listings since the earliest days of the Covid-19 pandemic, after a regulatory crackdown on Chinese technology groups stifled the flow of lucrative share sales vital to the city’s exchange.
Bankers had expected Hong Kong to pick up the slack after Beijing made its aversion to US listings clear with a crackdown on Didi Chuxing straight after the ride-hailing company’s US market debut in June.
But bankers and analysts say continued uncertainty over the status of Hong Kong as a listings destination in the eyes of Beijing, along with a host of other factors, has stalled those plans.
“This year is kind of a wash,” admitted the head of Asia-Pacific capital markets at one Wall Street investment bank, adding that most banks and brokers were not expecting a rebound until the first quarter of 2022 at the earliest, with dealmakers hungry for clarity from Beijing on its new regime for offshore listings.
Chinese tech groups raised just $671m from Hong Kong listings over the past three months. Total new listings also raised $6.5bn — down almost 60 per cent year-on-year, according to data from Dealogic. That marked the worst performance on both counts since the first quarter of 2020, when the Covid-19 pandemic first ripped through global markets.
Shares already listed in Hong Kong have also suffered a rough run. The Hang Seng index has fallen about 10 per cent this year, reflecting the regulatory action against Chinese tech groups that increasingly dominate its ranks, while the Hang Seng Tech index has dropped more than a quarter despite a rally for global tech shares.
Analysts said the sell-off and IPO freeze underscored Hong Kong’s vulnerability to the rolling clampdown on China’s tech sector, which has grown into a vital source of IPOs for the city after the bourse overhauled its listings rules in 2018.
“In the short term . . . I don’t think we’re going to see a ton of pressure for the IPO flow to restart in Hong Kong”, said Thomas Gatley, a Beijing-based analyst at Gavekal Dragonomics, pointing to statements from Chinese regulators about preventing the “disorderly expansion of capital”.
Gatley said a shift of tech IPOs from New York to Hong Kong was never likely to come through as quickly as bankers hoped — though it was probable “over the next couple of years”. But for start-ups that do pivot to Hong Kong, greater regulatory risk and the beating taken by Chinese tech stocks mean that “whichever way you price it they’re going to be looking at lower valuations”.
How much advantage Hong Kong gains will depend largely on revisions to China’s foreign listings regulations, which the country’s securities regulator is due to submit to top leaders in Beijing for approval at an undisclosed date.
In July, state media reported that “improving the regulatory system for overseas listings” was one of the top tasks discussed during a July meeting of China’s president Xi Jinping and other top officials about policy priorities for the second half of 2021.
Bruce Pang, head of research at China Renaissance, an investment bank, said this meant the China Securities and Regulatory Commission was likely to submit its reform plan before the end of this year.
But he said Hong Kong’s stock exchange was likely to refrain from publishing long-awaited changes to its own IPO rules until after the CSRC plan was public. That could hobble its ability to capitalise quickly on the queue of Chinese listings previously destined for New York, many of which might decide in the interim to list in Shanghai or Shenzhen instead.
The Hong Kong Exchanges and Clearing said it “warmly welcomes IPO applications from any company that meets our listing requirements”, adding HKEX had more than 200 active listing applications.
“[HKEX] clearly can’t come out and say ‘we’ll just list anything’,” said Fraser Howie, an independent analyst and expert on Chinese finance. “They’ve got to play along with the political directives coming out of the mainland.”
Howie said Hong Kong’s listing rules for companies in many sectors still included profitability requirements, and all applicants must be vetted by a listings committee. That is far more stringent than the US, where simple disclosure requirements have allowed Chinese companies to raise about $35bn in the years since HKEX reformed its IPO rules.
“It’s far from certain that Hong Kong either has a rosy future or is going to benefit as much as people think,” Howie said.