Hong Kong: The Bank of Belt and Road?
Since its inception as a British colony in the 1800s, Hong Kong has been viewed as China’s gateway to the world. Whilst no longer China’s preeminent port – that honour belongs to Shanghai – Hong Kong continues to hold a special place in China’s relationship with the outside. Under the ‘One Country, Two Systems’ framework, Hong Kong retains its own legal system and, crucially, control over its economic and financial affairs. As such, Hong Kong doesn’t have to abide by the capital controls that limit inbound and outbound investment in the rest of mainland China.
It’s not surprising, then, that the Chinese government has recently announced its intention to allow countries involved in the Belt and Road Initiative (‘BRI’) to raise funds via CNY-denominated IPOs in Hong Kong. On the surface, this seems like a real boon for the city - but what are the implications of such an initiative?
It’s all about the yuan
The crux of the proposal is that the funds will be raised in renminbi, rather than Hong Kong dollars. The internationalisation of the renminbi is a key driver of the BRI IPO initiative, and Beijing has been touting the notion that renminbi should become a global currency for some time. To date, there have been only two yuan listings in Hong Kong, neither of which has been particularly popular with investors – Li Kashing’s Hui Xian REIT is currently trading 40% below its 2011 yuan offer price, and Hopewell Highway, a toll road operator, hasn’t impressed investors either. As such, it’s unclear whether there’s much appetite for yuan listings among Hong Kong investors. Most notably, none of Hong Kong’s biggest companies – including Cheung Kong, Henderson Land or Sun Hung Kai – have expressed any enthusiasm at the news.
What about international investors? Due to tight capital controls, it remains difficult for foreign investors to fully trade in the Chinese stock markets, and only a handpicked group of institutional investors are allowed to trade Chinese A shares; foreign investors currently own just 1.5% of Chinese stocks. But it’s unclear whether there’s significant international demand: in 2017, inbound foreign investment fell for a second straight year, perhaps in response to China’s soaring debt and subsequent credit downgrading from Moody’s. In this light, perhaps the main reason why the Chinese government is considering the BRI IPO plan isn’t to provide funds for international infrastructure plans, but to increase much-needed foreign direct investment in China itself.
Boon or burden
So what does this mean for Hong Kong? For starters, it would give the city a boost in international IPO rankings. Hong Kong has long been a global IPO powerhouse; however, the last two years has seen a slump. Hong Kong raised total IPO funds of HKD 263 billion (USD 30 billion) in 2015, compared to HKD 195 billion (USD 25 billion) in 2016, and HKD 127 billion (USD 16 billion) in 2017.
Crucially, whilst there has been a significant decrease in the amount of IPO funds raised in Hong Kong, the actual number of IPOs has increased, meaning that Hong Kong is missing out on bigger ticket listings to rival exchanges. This is likely a result of the Hong Kong Stock Exchange’s failure to modernise and offer an attractive regulatory regime for technology and new economy companies. In 2014, for example, Hong Kong famously missed out on Alibaba’s IPO due to the Stock Exchange’s refusal to list dual class shares, often used by technology firms so that visionary founders can retain control. Viewed in this light, then, BRI IPOs could be a blessing to Hong Kong. Indeed, the Hong Kong Stock Exchange has already lowered the entry barriers for infrastructure companies to list, in a bid to attract BRI companies.
Hong Kong has long been a global IPO powerhouse; however, the last two years have seen a slump.
The risks, however, are equally clear. The BRI spans many countries associated with corruption and instability, which could prove a headache for regulators and investors alike; investor protection is crucial where foreign infrastructure projects are concerned. In addition, should the Hong Kong Stock Exchange ease its restrictions further for infrastructure companies or become embroiled in a regulatory mishap as a result, the reputational damage could be critical – Hong Kong’s status as a safe haven for investors could be in jeopardy.
Perhaps the main downside is that the biggest winner in the BRI is China itself. According to Archie Preston, a consultant for CITIC Guoan Group, the ability to raise funds in Hong Kong may just be a “safety net” in case domestic capital dries up – effectively relegating Hong Kong to a supporting role. “Many of the benefits of the BRI are expected to fall into the hands of large SOEs and well-connected private Chinese companies”, he adds. Perhaps this explains the reticence of Hong Kong’s biggest players?