Last year bankers celebrated when the chief executive of the Hong Kong exchange, Charles Li, announced plans for helping the next wave of Chinese tech giants go public. This is because they felt that finally Hong Kong would be able to compete against its toughest rival for initial public offerings, New York. This would allow them to offer the weighted voting rights to tech founders that they were demanding as they are common in the United States. However, in the last month, Hong Kong’s expected IPO party has been gatecrashed by a new rival; China itself.
The securities regulator in China announced on March 30th that its own pilot scheme for encouraging the exact same group of companies to list in Shenzhen and Shanghai. Beijing has also targeted other businesses that were high on Hong Kong’s agenda, which include the likes of Alibaba Group, Baidu and JD.com. It is giving them the option of listing at home through secondary listings. The Chinese tech firms that are at the center of this tussle have an estimated worth of $500 billion and they are expected to get listed in the next few years. These tech firms represent the biggest pool of IPO fees in the world, excluding the US tech sector.
As far as China is concerned, it wishes to see more of its companies list at home because this will ensure that domestic investors benefit from any success. Experts said that China was encouraging innovation, but it would be embarrassing if all such innovative companies just go overseas. The latest group that listed in New York was Baidu-backed iQiyi, which raised $2.5 billion last week in the biggest international Chinese technology listing after Alibaba. The appliance and smartphone maker Xiaomi and Meituan-Dianping, the largest provider of on-line demand services in China, are going to list in Hong Kong this year.
Xiaomi is hoping to get a valuation of about $100 billion. Beijing is increasing its efforts to attract the Chinese tech firms whereas Hong Kong is trying to play down the competition. After following the one-share-one-vote principle for a long time, Hong Kong will finally introduce the weighted voting rights option in the second quarter. The head of Hong Kong Exchanges and Clearing, Li said that there was no denying that firms would considering listing in the mainland, but a number of firms would also be interested in Hong Kong as well.
He said that competition was a factor, but there was no direct competition between capital markets in the mainland and Hong Kong as they had some fundamental differences. Bankers say that it the role of China’s interference in Hong Kong’s tech party would depend on how the rules will be implemented for Chinese depositary receipts (CDRs). These would enable Chinese investors to purchase securities of companies that are already listed overseas. As these CDRs will be traded in yuan, they present a unique arbitrage opportunity with the American Depository Receipts that are dollar-dominated or Hong Kong shares that are dollar-dominated.