Hong Kong goes back to the future as it tries to reboot

Attempts to invigorate trading volume broach familiar themes, but market quality is not one of them, writes ACGA Head of Research Jane Moir

Few could doubt Hong Kong’s resolve to entice issuers to its shores by offering a wide choice of fundraising structures, flexibility of capital management and ease of trade. A ‘build it and they will come’ ethos has decisively driven market reform over the past 12 months.

During this time, the stock exchange has lowered the bar on entry requirements for tech firms, scrapped separate class votes for H shares and laid out the welcome mat for SPACs. In proceeding years, it expanded the secondary listing regime and ushered in dual class shares.

In doing so a guardrail has been dropped here; voting rights subverted there. The cumulative effect has been a systemic pruning of the rulebook while assuming a heightened risk appetite among investors keen to tap into growth potential of up-and-coming PRC firms.

But it has turned out to be a year of thin pickings. In the nine months to September this year Hong Kong sunk from third to ninth place in the IPO rankings, with fundraising the lowest it had seen in 20 years, according to press reports. Once top dog, Hong Kong now ranks behind Abu Dhabi and India’s National Stock Exchange in terms of new listings. Market performance has meanwhile floundered, the Hang Seng Index down nearly 14% this year.

Against this backdrop, it was not entirely unpredictable that during the summer months policy makers brought sluggish trading volume into focus. There was a promise to holistically review external and internal factors behind Hong Kong’s liquidity problem in the hope of reviving the IPO market and boosting trading.

The L factor

Hong Kong has long been a liquidity enigma: even during the years when it retained the top slot in IPOs, it lagged other markets in annualised turnover relative to market cap. In 2019, this was the topic of a speech by then deputy CEO of Hong Kong’s securities regulator, Julia Leung. While Hong Kong clinched top positions in IPO fundraising and market capitalisation, it was well-eclipsed by other exchanges when it came to liquidity. She concluded “there is room to raise the turnover in Hong Kong.’’

Describing it as a complex subject, Ms Leung—now CEO of the Securities and Futures Commission (SFC)—nevertheless described a key factor: perceived problems with listed companies and securities. From its stakeholder engagement and own research, market quality emerged as a consistent theme.

Conspicuously absent from the current policy agenda is any measure to significantly address this. Among the “Task Force on Enhancing Stock Market Liquidity” agenda items are promoting more secondary listings and strengthening market promotion. The focus is unequivocally pro-issuer.

The oldies are goodies?

Two recent consultations seem to suggest policymakers at Hong Kong Exchanges and Clearing (HKEX) meanwhile believe the key to revival lays in the past. The stock exchange is proposing to breathe life into its second ‘growth’ GEM market by rehashing the rules to resemble the ones it had back in 2008. In a 159-page September 2023 consultation paper it suggests resurrecting a simplified stepping-stone mechanism for companies to make their way from GEM to the main board. This through-train was dropped in February 2018 amid a proliferation of shell companies using GEM as a springboard to circumvent main board listing requirements. The consultation, which concluded on 6 November, also proposes to reduce current financial eligibility thresholds.

And on 27 October HKEX released a 123-page consultation on treasury shares. It is a shorter version of a 1998 proposal by the SFC (in which just 15 people responded) which went nowhere and was revived briefly by the government in 2008 again to no avail. HKEX is proposing to change the listing rules to allow shares to be kept as treasury stock after a buy-back for future resale.

The rationale behind the proposal is to give issuers greater flexibility in adjusting their share capital; what has changed since 1998 is that 92% of Hong Kong-listed issuers are incorporated in jurisdictions which no longer restrict the use of treasury shares. The remaining 8% will still have to follow company law here and could not avail themselves of any listing rule change.

Eligible companies would not be required to cancel any shares they repurchase and could instead use them for resale. The current requirements that apply for an issuance of new shares would apply to a resale of treasury stock, approved by shareholders on a pre-emptive basis or with a specific or general mandate at a maximum 20% discount to market price.

What investors want

Perhaps it would be a more appealing premise for investors had the bourse thought to dust off another consultation of days gone by, namely a 2008 paper on proposed listing rule changes of which “Issue 11” dealt with the general mandate and the lack of pre-emptive rights.

Despite years of votes against the general mandate at Hong Kong AGMs, boards can issue new shares of up to 20% of the issued share capital, (together with repurchased shares up to that date of up to 10% of the issued share capital) without offering them to shareholders first.

Listed company ire was no doubt immense at the prospect of reform and HKEX shelved Issue 11 in 2009. For the next 15 years, shareholders have consistently voted against the general mandate. Reviving the debate might not solve Hong Kong’s liquidity problem overnight but it would certainly attract investor attention.