Commentary: But Shanghai may soon take initial-public-offering crown
By Craig Stephen
HONG KONG (MarketWatch) -- In the past decade, the Hong Kong stock market and the Hang Seng Index have successfully hitched their fortunes to the coming of age of China's economy and its emerging companies. But looking ahead, can this city of a mere 7 million people, that owes its existence to a geographical fluke of history, continue to play this lead role?
Symbolically, the recent announcement by HSBC (HK:5 88.80, +0.20, +0.23%) (HBC 57.42, 0.00, 0.00%) that it is pushing ahead with a Shanghai listing early next year looks like an important marker going forward. HSBC, after all, has for decades been the bellwether of the Hang Seng Index and local market. It's now telling us that Shanghai is the place to be.
Still, while Shanghai is on the up, this has not yet been at the expense of Hong Kong, which ends 2009 as the leading capital-raising market globally. This year, Hong Kong raised close to $30 billion in new listings, with Shanghai close behind after the 13.9 billion yuan ($2.04 billion) listing of China CNR Corp. brought its total to 187 billion yuan ($27.3 billion), according to Bloomberg data.
Hong Kong is still holding its own as a listing destination, thanks to its established presence and expertise, international exposure and liquidity. The absence of a convertible currency on the mainland and the restrictions on foreign investors mean Hong Kong retains a unique advantage. Also, in this age of global talent, Shanghai's 45% tax rates will deter any mass decamping from low-tax Hong Kong. But over time these hurdles are by no means insurmountable.
Near-term, both markets are in for another bumper year of listings, with Shanghai expected to edge ahead, according to Ernst and Young. The accounting firm predicts that Hong Kong IPOs might raise a record 370 billion Hong Kong dollars ($47.7 billion) in 2010, while Chinese companies are expected to raise 380 billion yuan ($55.7 billion) on the Shanghai Stock Exchange.
So far, Shanghai has been content to act as a purely domestic financial market for China -- but for how much longer?
With HSBC going ahead with a reported $8 billion listing, Shanghai could get a taste for the prestige and scale this brings and seek to be the premier listing destination of choice. Of course, HSBC is not abandoning its other key listings in Hong Kong and London -- as well as American Depositary Receipts in the U.S. -- but we should watch where the turnover moves.
The challenge for Hong Kong is to maintain its relevance and not just hope that Shanghai will be happy to divide up the spoils going forward. Outgoing Hong Kong Exchanges and Clearing (HKEx) Chief Executive Paul Chow, in his departure speech last month, warned that plans need to be made now. He cautioned it was inevitable China will move towards a convertible currency, jeopardizing Hong Kong's natural role as China's international financial center.
The incoming HKEx chief, Beijing-born Charles Li, who previously served as J.P. Morgan's China chairman, may be better positioned to straddle the two markets' needs, and it will be worth watching how he leads.
Still, there are plenty of groups happy to stick with the status quo. For instance, take Ronnie Chan, the chairman of Hang Lung Properties (HK:101 29.25, +0.55, +1.91%) (HLPPF 3.68, +0.00, +0.07%) , whose response recently to the Shanghai threat was to dismissively say they are at least 25 years behind. If you see the pace of development in Shanghai, especially investments in new rail networks and other infrastructure in preparation for the city's 2010 World Expo, such complacency is bordering on reckless.
To be fair a Hong Kong developer is not in the best position to comment on competition. Glance at the Hang Seng Index, and the glaring anomaly is the one sector that has seen no change in the noughties -- the property sub-index. The same tycoon developers remain reflecting a cozy, oligopolistic market, insulated from the chill of competition or technological change. Cheung Kong (HK:1 98.10, +0.25, +0.26%) (CHEUF 12.30, -0.05, -0.40%) , SHK Properties (HK:16 114.50, +0.20, +0.18%) (SHGKF 0.76, 0.00, -0.03%) , Henderson Land Development (HK:12 58.20, +0.55, +0.95%) (HLDVF 7.36, +0.10, +1.38%) , Hang Lung, Sino Land (HK:83 14.76, +0.10, +0.68%) (SNLAF 1.89, +0.02, +0.81%) and China Overseas Land (HK:688 16.50, +0.10, +0.61%) (CAOVF 2.00, -0.09, -4.08%) are all still there. No doubt Hong Kong remains light years ahead as a property market to make money compared to Shanghai or, come to think of it, anywhere else in the world.
By contrast, in areas where there is competition, such as tradable commerce and financial services, there are huge changes in the index make-up over the past decade. HSBC sits next to new mainland giants such as BOC (HK:3988 4.16, -0.04, -0.95%) (BACHF 0.53, 0.00, 0.00%) , Ping An (HK:2318 67.25, +0.20, +0.30%) (PIAIF 8.54, -0.11, -1.27%) , China Life (HK:2628 37.70, +0.20, +0.53%) (CILJF 5.10, -0.10, -1.92%) , and China Construction Bank (HK:939 6.66, +0.05, +0.76%) (CICHF 0.84, +0.01, +1.20%) , and must work hard to stay ahead.
The commercial sector in the Hang Seng Index is now made up of entrepreneurial, new mainland firms such as Tencent (HK:700 0.04, 0.00, 0.00%) (TCTZF 20.70, +0.85, +4.28%) , as well as some state-owned goliaths, including China Mobile (HK:941 69.90, +0.30, +0.43%) (CHL 44.92, 0.00, 0.00%) and PetroChina (HK:857 9.38, +0.09, +0.97%) (PTR 120.42, 0.00, 0.00%) .
These mainland firms are what really matter for Hong Kong -- attracting more of them and keeping existing ones will determine if the market remains in the top tier internationally. The test will be how Hong Kong and its exchange govern themselves in the years ahead to maintain relevance outside the myopic self-interest of the property developer tycoon elite.
