On 16 February 2015, Russia signed the International Organisation of Securities Commissions’ Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (the IOSCO MMoU)1 which paves the way for Russian companies to list on Hong Kong’s Stock Exchange (the Exchange).
With a market capitalisation of US$3,233 billion at the end of 2014, the Exchange is currently the world’s 7th largest stock exchange by market capitalisation, and the third largest in Asia after Japan and Shanghai. In terms of IPO funds raised, however, Hong Kong ranked second (after New York ) among the world’s exchanges in 2014, continuing a trend that has placed it in the world’s top five for the past 13 years.
The Hong Kong Stock Exchange is a leading international stock exchange which allows full access to foreign investors wishing to trade on its markets and offers a listing venue to foreign companies which are able to meet its requirements. The key advantage of Hong Kong and its stock exchange is its strategic position as the gateway between Mainland China and the rest of the world. Hong Kong has long been the preferred international listing venue for mainland Chinese companies looking to raise funds in the international capital markets and there are currently 876 Chinese companies listed on the Exchange which account for 60% of the total market capitalisation.
The Exchange has also been keen to list more international companies, and recent years have seen an increasing number of international companies listing in Hong Kong.
There were 1,752 companies listed on the Exchange as at 31 December 2014, of which 1,548 were listed on the Exchange’s Main Board. A key factor attracting foreign companies to Hong Kong market is the depth of liquidity in both its primary and secondary markets.
There were 115 new listings2 on the Exchange in 2014 which raised US$ 29.4 billion (up 33% from 2013). The ease of raising funds post-listing is also attractive to foreign companies. In 2014, listed companies raised US$91.3 billion post listing, an increase of 238% on 2013.
Hong Kong currently ranks as Asia’s top international financial centre. Among the benefits of listing on the Hong Kong stock exchange is that this provides overseas companies with access to investors in Mainland China, currently under the Qualified Domestic Institutional Investor (QDII) programme. This allows Mainland Chinese financial institutions to raise funds in the domestic Chinese market and to invest US$76.79 billion in offshore securities markets. The importance of Mainland Chinese investors is expected to grow and the Exchange is now positioning itself as the vehicle through which Mainland Chinese investors can invest internationally.
A first step in that process was the launch in November 2014 of the Shanghai-Hong Kong Stock Connect pilot programme which allows certain Mainland Chinese investors to invest directly in Hong Kong listed stocks for the first time. Although currently restricted to Hang Seng Index companies, it is likely that the programme will be expanded to include other stocks in the future. If this is the case, a Hong Kong listing will offer international companies even greater access to Mainland China’s investors.
Launched in November 2014, the pilot programme allows investors in Hong Kong and China to trade eligible shares listed on the other market through the exchange and clearing house in their local market.
Under the so-called Southbound Trading Link, Mainland investors can trade the constituent stocks of the Hang Seng Composite LargeCap and MidCap Indexes, and all H-shares with corresponding A shares listed on the Shanghai Stock Exchange.
Trading is subject to aggregate and daily quotas. The northbound trading link has an aggregate trading quota of RMB300 billion and a daily trading quota of RMB13 billion, while the southbound trading link has an aggregate trading quota of RMB250 billion and a daily trading quota of RMB10.5 billion. It is not however possible to purchase IPO shares through Stock Connect.
The quotas apply on a “net buy” basis, meaning investors can always sell their cross-boundary securities regardless of the quota balance. Mainland investors are restricted to institutional investors and individuals holding RMB500,000 in cash & securities, whereas all Hong Kong and overseas investors are eligible for North-bound trading.
A similar scheme to allow the mutual trading of shares between the Shenzhen Stock Exchange and the Hong Kong Stock Exchange is expected to be launched in the second half of 2015.
BENEFITS OF LISTING IN HONG KONG
Key advantages of Hong Kong as a listing venue are its established legal system based on English common law and its regulatory framework which is on a par with those in other international finance centres, which give investors confidence in the Hong Kong stock market. It also offers many tax advantages, currency convertibility, free transferability of securities and no restrictions on capital flow.
In addition to fund raising opportunities, Hong Kong offers foreign companies the chance to raise their profile and visibility in China and the rest of the Asia-Pacific region. This has proved particularly attractive to companies in the luxury goods sector and high profile companies such as Prada, Coach, L’Occitane and Samsonite have listed in Hong Kong in recent years.
China’s position as a major consumer of energy, minerals and metals has also attracted a number of mining and natural resource companies to list in Hong Kong. These include Swiss commodities giant Glencore International AG, Russia-based United Company Rusal PLC, Kazakhstan copper miner Kazakhmys PLC and Brazilian metals and mining company Vale S.A. Vale S.A was also the first company to list on the Exchange in the form of depositary receipts (HDRs). The Exchange’s Listing Rules allow overseas companies to list on the Exchange’s Main Board (but not on its Growth Enterprise Market) in the form of HDRs rather than ordinary shares. This is intended to allow the Hong Kong listing of companies from jurisdictions which restrict the movement of shares abroad or prohibit an overseas share register or splitting of the share register.
|Hong Kong Listings of Overseas Companies|
|Issuer||Country of Operations/|
|Country of Incorporation||Sector||Year of Listing||Funds Raised(HK$ billion)|
|Glencore International plc||Headquartered in Switzerland||Jersey||Natural Resources||May 2011||77.75|
|RUSAL||Russia||Jersey||Natural Resources||January 2010||17.39|
|Mongolian Mining Corporation||Mongolia||Cayman Islands||Natural Resources||October 2010||5.81|
|PRADA SpA||Italy||Italy||Luxury||June 2011||19.23|
|Samsonite International SA||Headquartered in United States||Luxembourg||Luxury Goods||June 2011||10.09|
|L’Occitane||France||Luxembourg||Luxury Goods||May 2010||5.5|
|Vale SA(HDR Listing)||Brazil||Brazil||Natural Resources||December 2010|
|Kazakhyms PLC||Kazakhstan||United Kingdom||Natural Resources||June 2011|
|Coach, Inc(HDR Listing)||United States||United States||Luxury Goods||December2011|
1 The current list of signatories to the IOSCO MMoU is available at: http://www.iosco.org/about/?subSection=mmou&subSection1=signatories
2 Excluding 7 companies which transferred their listings from GEM to the Main Board. HKEx. “Market Statistics 2014” at page 2 available at http://www.hkex.com.hk/eng/newsconsul/hkexnews/2015/Documents/150108news.pdf