A bad day for the Hong Kong stock exchange

Not only was the Hong Kong market badly hit by actions taken by the US administration against China with the announcement of new import tariffs, the Hong Kong stock exchange also had a nasty reminder of how vulnerable it is. On Friday 16th March, Yan Qingmin, vice-Chairman of CSRC, the Chinese securities regulator, announced that China Depository Receipts (CDRs) would be launched “very soon”, which according to Reuters means by the end of this year. If China wanted to pull the rug from under the Hong Kong stock exchange’s feet, it could not have done better.

Flashback: Hong Kong wanted to get Alibaba’s listing back in 2014, but the rigidity of the one share one vote principle enshrined in Hong Kong rules pushed its founder Jack Ma to set up his holding company offshore using what is technically known as a Variable Interest Entity, and list it in the US using American Depository Receipts (ADRs). Since then, numerous Chinese companies largely coming from the internet space took the limelight by following the footpath of Alibaba, with the massive success that we know, and to Hong Kong’s chagrin. They now collectively have a market capitalisation of $4trn. After three years of soul searching the Hong Kong stock exchange finally took the step to swallow its pride and did a splendid U-turn on the matter. It announced in December 2017 that it would launch soon a consultation paper to allow dual-class listings in Hong Kong, sending to the bin its sacrosanct principle of one share one vote. The purpose is not only to attract unicorns ($1bn+ start-ups) and well-established behemoths such as Xiaomi, the smartphone manufacturer, but also to convince Alibaba and other ADR issuers to move back to Hong Kong.

As Xi Jinping laid out his 25-year vision for China that largely revolves around technology, the Chinese authorities were fast to react as they saw the menace coming from Hong Kong: Technology companies will soon be allowed to issue CDRs on the A shares market. The reform is on a fast-track. This will allow Chinese retail investors to finally participate in the growth of their national heroes that are currently listed in New York without having to go through torturous paths meant to circumvent the exchange control system currently in place. For Tencent, the fifth largest company in the world listed in Hong Kong, issuing CDRs will give it exposure to its 900 million Chinese users who will no longer need to use the Stock Connect platform that links the mainland bourse to the Hong Kong one.

Coincidently, the green light given to CDRs is going to happen shortly after the introduction of A shares in MSCI emerging market indices, scheduled for May 2018.

The day after Mr. Yan’s comment filtered out, both Alibaba and its competitor JD.com announced being ready for the CDR move. Together they account for $500bn of market capitalisation through their existing ADRs.

The year 2018 is going to be a milestone year for the Chinese A share market.

But it did not start well for Hong Kong as a marketplace.

Fabrice Jacob is CEO of JK Capital Management Ltd., a La Française group member company

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