Who’ll rein in the bull?

In what would have seemed unthinkable just a few years ago, Hong Kong’s stock market has overtaken New York to claim second place in the world, after London. Peta Tomlinson describes how

According to some, Hong Kong has Sarbanes–Oxley to thank. Is the impact of compliance really hurting the US market, as some would argue, or is it more the nature of the beast – that Asia’s thriving economy, underpinned by China, simply makes Hong Kong the best place to be?

According to Tse Kwok Leung, senior economist with the Bank of China, the burden of disclosing accurate, reliable financial information at the level required by the Sarbanes–Oxley Act is simply proving too costly and too onerous for many of the Chinese Mainland’s former state-owned enterprises, which are now morphing into some of the largest initial public offerings (IPOs) in the world. As a result, this has ‘curbed the interests of China enterprises to list in the New York market’.

‘I believe [Sarbanes–Oxley] is a major factor,’ says Tse. ‘If there were no such acts, maybe many Chinese companies would want to dual-list both in Hong Kong and New York. But because of this act, they have given up on New York, and choose only Hong Kong.’

He adds that the damage this has caused may be permanent – even if Sarbanes–Oxley is watered down – as Chinese companies find they don’t need New York after all. Hong Kong’s market is already international, and recent successes have seen it develop even further. The city also offers its Chinese neighbour a cheaper cost base, more simplified reporting, cultural synergies and geographical convenience.

A more likely scenario, asserts Tse, is that Shanghai will replace New York as the preferred platform for dual-listings with Hong Kong. He points to last year’s record-breaking dual float of the Industrial and Commercial Bank of China (ICBC, China’s biggest lender) as the role model of the future.

Nick Andrews, JP Morgan’s head of Asia Pacific and emerging market equities, agrees that Sarbanes–Oxley has contributed to Hong Kong’s success because it has increased the cost of a New York listing. But he adds that Hong Kong also has strong liquidity, research, general market coverage and, critically, a broad retail following. ‘The market is a well respected, well regulated market which has evolved significantly over the past decade. In short, Hong Kong provides all of the benefits in a “one-stop shop” for most situations.’

Shanghai will definitely become more important as a listing market, Andrews continues. ‘The trend started with Hong Kong-listed H share companies doing follow-up A share IPOs in Shanghai, and is moving rapidly to simultaneous A and H shares offerings. This will definitely continue, in my view. Currently, the valuation differential between the two markets makes an A share listing compelling.

‘The differences between the two markets will reduce, but the weight of liquidity onshore will still encourage dual-listings. Over the longer term, Shanghai is likely to continue to narrow the gap with Hong Kong as the primary listing venue.’

Howard Chao, the Shanghai-based partner in charge of global law firm O’Melveny & Myers’ Asia/International, agrees Sarbanes–Oxley has played a role in steering listings towards Hong Kong, while adding ‘many factors’ are also involved.

‘Hong Kong has become the natural market for IPOs by Chinese companies primarily because of its proximity to China, the fact that most of the China-savvy investors and bankers are located there, the fact that Beijing wants to support Hong Kong, and because the secondary market for Chinese issues has traditionally been strongest in Hong Kong,’ he says.

‘With the rapid rise of China’s economy, a large number of Chinese companies have looked to Hong Kong to list. Of course, another factor has been issuer concern about the overall regulatory environment [including Sarbanes–Oxley] and related risks of liability in the US market. After China Life was sued in the US, Chinese large state-owned enterprises essentially stopped doing registered offerings in the US, although they continue to tap the US for large amounts of capital through Rule 144A offerings. However, there are still many mid-sized Chinese private companies, especially those with a tech focus or strong international management, coming to the US to list. Our pipeline for US-registered deals is strong, as is our pipeline for Hong Kong deals.’

Raise profile

Chao agrees that, for Chinese companies, the dual-listing model of the future may indeed be Hong Kong and Shanghai. By listing in both, companies can take advantage of the strong market demand in both markets, and raise their profile in the domestic Chinese market, which is often their ultimate target customer and operating market, he points out. However, currently it is not possible to list in Shanghai unless you are incorporated in China.

But Leiming Chen, a Hong Kong-based partner at the law firm Simpson Thacher & Bartlett, is not drawing any conclusions from Hong Kong’s 2006 results. It was, he says, a year when either one of the two mega-listings (Bank of China, which raised US$11bn, and ICBC, which raised US$16bn) could have pushed the listing stock market over the line, and Hong Kong was fortunate to have both. 2006 was a year that ‘won’t be repeated’, he argues.

While Chen agrees Sarbanes–Oxley and the China Life class action have both had ‘a chilling effect’ on both NYSE and the NASDAQ, he says only the former state-owned enterprises seem to have been deterred. ‘In the private sector, we are seeing even more [Chinese] companies seeking to go to the US, particularly those technology-based companies for whom the US investor awareness [and therefore market valuation] is better,’ says Chen.

‘At the end of the day, yes, Sarbanes–Oxley weighs heavily on many minds. But there are also some misconceptions regarding the impact of Sarbanes–Oxley compared to the regulatory environment in Hong Kong.

‘Hong Kong has fairly strict requirements for listing companies, although they are less defined than in the US, and enforcement is more uncertain. It’s not necessarily so that the US has more rigid rules – it’s just that they’re more predictable.’

Until China has a freely convertible currency, Shanghai will never be an international financial centre, further shoring up New York’s position, Chen says.

And emerging markets also bode well for the US, he adds, with more Indian companies choosing to list in New York. He cites last year’s listing of Japan’s Mizuho Financial Group, one of the largest financial institutions in the world and the first Japanese company to list on NYSE, as evidence of a growing willingness of Asian companies to list in the US.

‘We’re seeing a lot more deals in the pipeline compared to this time last year, and it is healthy to have more choices,’ he says.

JP Morgan’s Nick Andrews agrees that a New York listing can make good sense in certain situations – for example, where a company has a business model which is not widely understood in the Asian markets, and where there are more comparable companies trading in the US. This has typically applied to high growth technology companies, he says.

Yet according to Melbourne Age financial journalist and author, Leon Gettler, the US stock market is being eclipsed by the forces of globalisation, not the costs of Sarbanes–Oxley. And it is only going to get worse, adds Bloomberg columnist Matthew Lynn, who says both New York and London ‘have become alarmingly complacent about their positions’.

The message for America, says the website Sox First, is: it is a big world out there, get used to it.

Peta Tomlinson is a freelance journalist who writes for the South China Morning Post and the Hong Kong Trade Development Council.