 |
| Several U.S.-listed Chinese companies may seek a listing in mainland China or Hong Kong Source: 2d illustrations and photos/ iStock/Getty Images Plus via Getty Images |
Stock exchanges in Hong Kong and mainland China will get a boost in their trading and listing volumes from Chinese companies seeking to list outside the U.S. even as a longstanding audit dispute between Washington and Beijing is resolved.
Investors and issuers seeking exposure to the Chinese economy will likely gravitate toward the Hong Kong, Shanghai and Shenzhen bourses if more U.S.-listed Chinese companies list in those venues or exit the U.S., analysts said.
"The homecomings of these Chinese companies can definitely add trading volume, particularly from those institutional or retail investors based in mainland China via HKEX–mainland China interconnectivity," said Ricky Lee, managing director for valuation advisory services at Kroll, a risk advisory firm. "Investors tend to purchase stocks they are familiar with."
Chinese companies eye U.S. de-listings
For more than a decade, the U.S. Public Company Accounting Oversight Board, which inspects and investigates public accounting firms around the world, was restricted by Chinese authorities from being able to evaluate the working of such firms registered in mainland China and Hong Kong.
In 2020, the U.S. Congress passed a law under which companies audited by such firms would be subject to a trading prohibition on U.S. markets if the PCAOB's ability remains restricted, potentially resulting in the delisting of more than 200 Chinese companies traded on U.S. exchanges.
However, authorities in the U.S. and China signed an agreement in August enabling inspections and investigations of registered public accounting firms headquartered in mainland China and Hong Kong. The move is expected to reduce the threat of delisting, though not eliminate it, given uncertainties around enforcement of the deal. Chinese companies are keeping open the option to list on their home exchanges.
According to a KPMG report in June, at least nine U.S.-listed Chinese companies, such as internet service provider Baidu Inc. and video-sharing mobile app Kuaishou Technology, have listed in Hong Kong ever since the U.S. Securities and Exchange Commission expressed concerns about allowing Chinese companies to remain listed if they fail to meet U.S. auditing standards. Since August, five other Chinese state-owned companies, including China Life Insurance Co. Ltd. and oil giant China Petroleum & Chemical Corp., have said they planned to apply to de-list from the U.S.
There are 264 public companies headquartered in mainland China or Hong Kong that trade on the New York Stock Exchange, NYSE American, and NASDAQ, the three largest U.S. exchanges. These include Alibaba Group Holding Ltd., JD.com Inc. and Baidu. They had a combined market capitalization of $870.09 billion as of Aug. 30, representing 1.9% of companies listed on the three exchanges, according to S&P Global Market Intelligence.
Boost to trading volume
The listing of U.S.-listed Chinese companies would provide a shot in the arm for Hong Kong Exchanges and Clearing Ltd. in particular, which is increasingly reliant on fundraising by mainland Chinese companies, as well as stock trading via various mutual market access programs with the mainland. The return of these Chinese companies will also help the bourses in Hong Kong and on the mainland remain as some of the world's largest IPO destinations, as market liquidity could grow after hosting large Chinese companies that are in the portfolios of many global fund managers.
Bourses in Hong Kong and mainland China have suffered lower trading volumes and IPO activity in 2022, due to weak investor sentiment amid the global economic downturn.
In Hong Kong, average daily turnover fell 27% year over year to HK$138.3 billion in the first half from HK$188.2 billion. Trading is a key revenue source for the exchange, as investors are able to access both local and mainland Chinese stocks via stock connect programs.
Despite the overall decline in trading volume in Hong Kong, the listings of China's JD Logistics Inc. and Kuaishou Technology in 2021 have contributed some increase in trading activity for the exchange, Hong Kong Exchanges and Clearing Ltd. said in its Aug. 17 earnings report.
Fundamentals matter
"For international investors, it is really the fundamentals of these Chinese companies that matter and not the listing location as Hong Kong is relatively accessible to them," said Avishek Suman, Beijing-based head of investment research for China at Acuity Knowledge Partners.
The additional liquidity in the three bourses will come both ways; from international investors investing into mainland China and mainland Chinese investors looking to purchase shares in companies listed in Hong Kong, said Kroll's Lee. Up to 10% of stock market turnover in mainland China and up to 25% of stock market turnover in Hong Kong come from the mutual market access program, Lee noted.
The stock connect only allows access for primary-listed stocks, including dual-primary-listed companies. Only the bigger companies may find it worthwhile to obtain a second primary listing due to the costs. Companies that have secondary listings in Hong Kong, such as Alibaba, are currently excluded from the program. Alibaba said on July 26 that it would try to add a primary listing on HKEX, alongside its NYSE listing.
Under HKEX’s stock connect program, average daily turnover of Southbound trading — which allows mainland investors to trade in the Hong Kong bourse — and vice-versa with Northbound trading came to 103.9 billion yuan and HK$33.2 billion, respectively, in the first half, contributing about HK$1.19 billion, or 13% of the group's total revenue for the period, according the HKEX's filing.
Index tracking funds, such as Exchange Traded Funds, or ETFs, which tend to include eligible big cap stocks, could indirectly boost volumes. The average daily turnover of ETFs rose by 59% year over year to HK$9.7 billion, compared to a 27% drop in headline average daily turnover, according to HKEX, which began the inclusion of ETFs in the stock connect in July.
Shanghai and Shenzhen ranked number one and two globally in IPO fundraising proceeds in the first half, while Hong Kong dropped by 92% in the same period, according to EY data. The Shanghai and Shenzhen bourse are expected to maintain their rankings for the entire 2022.