Picture the scene. It’s the largest equity deal of the year in Hong Kong and the mood is celebratory: overwhelming investor demand means the IPO can be priced at the very top of its marketed range.
Investment bankers are popping the champagne corks and retail investors are salivating at the prospects of profiting in the market after the deal begins to trade.
Except that the shares don’t list, because along comes someone to spoil the party. But the person that WiC is thinking of isn’t Xi Jinping (according to the Financial Times, it was the Chinese leader who made the final decision to pull Ant Group’s $35.4 billion Hong Kong and Shanghai IPO 55 hours before it was due to start trading this month).
No. The person in question is an elderly tenant of Hong Kong’s subsidised rental housing scheme called Lo Siu-lan.
That’s because – while it is almost unheard of for an IPO to be cancelled after it has been priced – there is a precedent in capital markets history. And it also comes from Hong Kong: the Link Reit.
Ant and Link Reit share similar experiences a decade-and-a-half apart. But there are differences in their stories that may hold lessons for future IPOs of Chinese firms in the jurisdictions competing for their business: Hong Kong, New York, more recently London and, of course, China itself.
Back in 2004, widow Lo took on the Hong Kong government over the biggest privatisation in the territory’s history and won – initially, at least. Her challenge prompted a judicial review of whether the government could inject public assets into a real estate trust. Lo was worried that rents would soar under private sector management and Hong Kong’s Supreme Court threw out the government’s bid to shorten the legal appeals process to a few hours, prompting the IPO’s demise.
“Justice must be done and it must be seen to be done,” ruled Chief Justice Andrew Li at the time.
The following summer Lo lost her case and a few months later the Hong Kong government relaunched the IPO to great success. Ant Group will be hoping that it can pull off the same feat next year – after the unveiling of new regulations for the fintech sector (officially the reason why its IPO was pulled this month).
The Link Reit story demonstrated that Hong Kong’s government was subject to court verdicts. In many ways it bolstered the city’s credentials as a financial services hub. Issuers and investors took comfort from the fact that due process was followed and that the law was applied in a fair and impartial manner. But Ant’s experience this month hasn’t conveyed the same message. For a start, it has undermined investor confidence in the new registration- based IPO system for Shanghai’s STAR market, which was designed to replace an approval-based approach (companies are supposed to be allowed to list if they fulfil the required disclosure requirements). Or as the Nikkei puts it, the “transparent regulatory environment of the sort needed to make Shanghai a premier financial centre appears to be a work in progress”.
The debacle raises other questions, not least whether lurking political risks will dissuade international investors from putting more of their capital to work in China. Could that decision slow down, or even reverse, the recent trend for China’s national champions to delist from American stock exchanges and return home too?
Some commentators outside China have focused more on what they perceive as the positives in the shelving of the Ant IPO: that China’s government is unafraid of taking on giant corporations and demonstrating who’s the boss.
They contrast this stance with perceived government inaction towards the buccaneering behaviour of Silicon Valley’s tech giants, although this approach may now be changing as well. Last month the US Department of Justice filed an antitrust suit against Google; the European Union has just charged Amazon with breaching competition rules; while Australia is introducing laws that will compel the biggest tech firms and social media platforms to pay publishers for content.
It has also been widely reported that Ant’s fate was sealed when its founder Jack Ma derided the state-owned banking sector in a speech in late October (see WiC517). Hence investment bankers in Hong Kong told WiC that what happened to Ant was a one-off – the cutting down of the tallest poppy, amid concerns from some regulators that Ant might destabilise the financial system.
But the bankers also agreed that the sudden implosion of the IPO will have done nothing to diminish the attractiveness of an overseas listing from the standpoint of future Chinese issuers.
It may even reverse some of the narrative of Chinese companies withdrawing from US bourses, particularly if President-Elect Joe Biden adopts a more emollient tone in Sino-US relations.
The exodus of Chinese firms from the US this year has been geopolitically driven and accelerated by the Trump administration’s move to introduce legislation that forces Chinese companies to meet US accounting requirements. It’s not clear whether Biden will follow through with this legislative push to enforce the new accounting rules. But China’s biggest IPO of 2020 came from one such returnee from the US: the Rmb46.3 billion ($6.6 billion) Shanghai STAR Market listing of semiconductor giant SMIC.
Two other major returnees – JD.com and NetEase – chose Hong Kong to raise new capital, although they have kept their counters on Nasdaq – for now, at least.
The US stock exchanges don’t want to lose access to such lucrative deal flow. China accounted for 45% of global IPOs in the first nine months of the year and half of all US cross-border listings, according to accounting giant EY. Shanghai welcomed a fifth of the total (180 listings), followed by Nasdaq (119), Shenzhen (115) and Hong Kong (99).
But while Shanghai is getting most of the flow, New York is winning some of the biggest listings and London is trying to get in on the action too. Dealogic data shows that among those companies that had launched the 10 largest Chinese IPOs this year two chose New York (Lufax and Beike), while another chose London (China Pacific Insurance).
American investors want to buy shares in Chinese companies because of their earnings growth potential relative to most firms in the US. They also like being able to trade them on their own doorstep, although many participate in Hong Kong secondary market listings as well, so that they can trade on breaking news more immediately in the Asian time zone.
As a result, Hong Kong could end up as the biggest winner in the battle of the bourses. There has been a stream of jumbo IPOs and secondary listings this year with more to come, notably Kuaishou’s $5 billion flotation and JD Health’s $3 billion debut. Dual Hong Kong and New York listings also seem to be working well, particularly for China’s biggest companies. Fears that trading liquidity would leach back to New York haven’t materialised. Quite the opposite, in fact, for Alibaba’s Hong Kong market capitalisation, which has grown from about $13 billion to $50 billion since its landmark listing in 2019. NetEase seems to be following a similar pattern, since its $3.13 billion secondary listing in June.
Smaller Chinese companies worry that they might not maintain the same level of investor interest in Hong Kong if they choose to list there too. This is a problem that London faces in persuading Chinese firms to sell shares in the British capital as well. As we wrote in WiC516, the UK has attracted four Chinese companies since the London-Shanghai Stock Connect became operational in June 2019. The problem with the stock trading link is that liquidity is mostly one way – investment into China – because currency regulator SAFE doesn’t want to give Chinese retail investors a channel to remit money out of the country. That seems unlikely to change in the near future.
Essentially, Hong Kong, London and New York share many of the same investors. But the final decision on where a company should sell its shares comes down to a mix of the management’s preferences and the political situation.
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