Over more than six months, the global investing community waited as it unfolds whether the listing of a major China leading internet technology company would end up at the New York Stock Exchange or the Hong Kong Stock Exchange.
Last week, Alibaba Group Holdings Limited announced the company’s plans to pursue its initial public offering in the United States, abandoning its bid over the past months to list in Hong Kong. In the end, the challenges Alibaba faced in introducing special founders’ rights for management control would not go away in Hong Kong’s system of “one vote per share”. Instead, Alibaba’s proposal can be more readily accepted under the “dual-class” share structure available in the United States.
Charles Li, Chief Executive officer of the Hong Kong Exchange, said in response: “We respect the company’s decision and wish it well. We are proud of our tradition of respect for the rule of law and adherence to principles. However, we also need to find ways to make our market more responsive and competitive, particularly with respect to new economy or technology companies.”
It was a brief few lines to conclude the matter, in contrast to the lengthy expositions that Charles Li previously shared on his blog, “Charles Li Direct”, on the crucial regulatory debate of the HKEx and the Hong Kong Securities and Futures Commission in considering Alibaba’s proposed listing.
Alibaba wishes to list with special rights that will allow Alibaba’s founders to preserve management rights even with relative minority. The issue has been hotly debated, as the proposal is at odd with Hong Kong listing rules, but some suggested Hong Kong review its rules, especially to keep up with the US that allows dual class structures as adopted by technology companies such as Facebook and Google.
In the end, Hong Kong is not going to bend its rules for one company, and would not issue a special waiver to Alibaba. Any changes to the rules in order to permit an innovative share rights would need to be according to due process, which can only be upon consultation and formal amendment to the listing rules, and takes time.
Alibaba going to NYSE instead HKSE with its initial public offering size of estimated US$15 billion, raised question on Hong Kong’s competitiveness. Recently, Alibaba’s competitor JD.com, and Sina Weibo, are pushing ahead with listing plans in the US.
Hong Kong has long assumed a unique position of being the jurisdiction of choice for Chinese companies seeking to raise global capital, and correspondingly for investors looking for a piece of the China success story. As of 28 February, there are 162 H Share-listing of Chinese companies on the Main Board of the Hong Kong Exchange, with total market capitalization of HK$4.5 trillion, and 32 companies on the GEM Board, with total market capitalization of around HK$5 billion. In 2013, total H Shares IPO raised HK$89.7 billion of funds, and HK$3.2 billion of Red Chip IPOs.
On the other hand, 67 Chinese companies are listed on the New York Stock Exchange, as at end of November 2013. 8 Chinese companies listed in the United States during the year and raised US$1.1 billion, and there are many more that could be listing in that market this year, including Alibaba. Also listed in United States is Baidu, another top China internet e-commerce company, with a market capitalization of currently US$55.4 billion and traded on NASDAQ.
Hong Kong’s position of advantage is not guaranteed. There is a need for Hong Kong to continue to attract Chinese companies to list here, especially when other markets like the United States, London and Singapore fight for the same opportunities vis-à-vis China.
“Other markets are catching up fast with Hong Kong, also for innovative development such as the RQFII program”, a product specialist at a leading asset management in Hong Kong said. “In the past 6 months, there have been new RQFII China A Shares funds successfully listed in the US and others are being planned.”
While Hong Kong was a pioneer in the Renminbi Qualified Foreign Institutional Investors scheme in late 2011, the program has since also extended to qualifying asset managers in London, Singapore and Taiwan to allow investment into equities and other securities in China domestic market.
Further, with the evolution and opening up of the domestic China market as well as RMB internationalization, Hong Kong may face loss of business to the Shanghai and Shenzhen stock exchanges. Many China companies could choose to list at home instead of overseas. Although gradual and in small steps, China regulators are also continuing to expand approvals for foreign investment into China equities.
No doubt the rule of law in Hong Kong is of utmost importance. The loss of Alibaba’s listing should spur the debate of any changes going forward and Hong Kong’s competitiveness. There have been strong arguments both for and against, and the conversation needs to continue.
It may be that Hong Kong decides in the end that it shall not pursue changes to chase after specific breed of companies like Alibaba. With increasing competition all around, the key is that Hong Kong needs to proactively address any challenges and seek such measures as appropriate to stay ahead as a global financial centre, without compromising its rule of law.
As Li said, “We have to consider possible changes where they might be necessary, with everything according to our due process. The Listing Committee’s work on shareholding structures didn’t start because of Alibaba and will not end now because of Alibaba. We need to ensure our markets continue to be relevant in the new era of economic development.”
Also see the following around the Web on this matter:
Bloomberg: Alibaba Loss Seen as Price Worth Paying for Hong Kong Investors
Reuters: Alibaba’s choice spurred by rivals, HK impasse