Singapore Exchange (SGX) Executive Vice-President Sutat Chew said on March 9 that the SGX would soon unveil a consultation paper regarding rules over listings of “dual-class shares”, also known as “weighted voting right structures”. The consultation period will be about two months. He also expected the first company to be listed on the SGX as “dual-class shares” in July; it will most likely be a Hong Kong-based technology firm. Chew maintained that Hong Kong is no longer a complete offshore center or international market but “semi-offshore/semi-onshore”. This is because its securities exchange has established trading connections with mainland stock markets. He said companies listed on mainland stock markets have little to gain from listing in Hong Kong at the same time. “Hong Kong is part of China, whether you like it or not. Singapore is not. Is Hong Kong really the best place to list, where the Chinese mainland has some influence on the Securities and Futures Commission (SFC)?” Chew asked. The main reason why the SGX is opening its doors to “dual-class shares” is growing competition among securities markets around the world. This is the same reason why the HKEx will allow “weighted voting right structures” to attract tech companies already listed on overseas markets and mainland stock markets in Shanghai and Shenzhen. As economies around the world embrace science and technology as the new growth engine, it is a matter of course for capital markets to find new ways to attract “unicorn” tech firms with profit potential. Such competition is no different from traditional rivalry among leading stock markets in its nature. That said, Sutat Chew’s comment about Hong Kong and mainland stock markets raises a very important question: Has the expanding connection between stock markets in the two places changed the nature of HKEx and therefore relegated its position in the international arena?
It is no surprise that the authorities in Hong Kong have been critical of Chew’s comments. SFC Chairman Carlson Tong Ka-shing on March 14 described his remarks as “nonsense” and reiterated that the SFC is an independent market regulator. SFC Chief Executive Officer Ashley Alder also explained that Hong Kong and mainland stock market regulators operate under different systems. This ensures the SFC’s independence even when it needs to join forces with its mainland counterpart in risk management. There is no question as to who has the most influence because their relationship is based on communication only.
I agree with SFC’s view on this issue but I also want to stress that Chew’s opinions should not be ignored. This is because he is not alone in saying such things. His views are quite common among securities markets, where many regard the mainland as an “outsider” because its stock markets are not as open as they should be. That is why some people think the HKEx’s international prestige has been weakened by stock connects with Shanghai and Shenzhen.
By Western standards, China’s mainland securities markets still have a long way to go in terms of openness compared with other world securities markets. However, current Western standards are being shaken by unprecedented, profound and all-round structural adjustments to the global economic financial and political paradigm. This means any assessment of cooperation between Hong Kong and mainland stock markets needs some corrections of its own.
First, because of the “financial crisis of the century” which started in the US in 2008, the mainland stock markets now emphasize serving the real economy as the main criterion for standard operations. They refrain from developing derivatives which their Western counterparts used to be so fond of doing.
Second, the US government has adjusted its global strategy this year, including declaring China as one of its main rivals and significantly increasing tariffs on some imports from China. This is supposedly to “get even” with China over its hugely unfavorable balance of trade. This trend is expected to affect its stock markets as well. So far mainland-based Chinese enterprises usually need to consider two things when deciding where to go public. One is which stock market is easier to be listed on and how suitable the denominating currency is for investment and business operations. Ease in listing is actually a comparison with market regulations on the mainland; while the need to choose a foreign currency comes from the fact that renminbi is still not fully convertible. The other aspect is whether the overseas stock markets they choose will help their long-term growth. This includes how accommodating they are to refinancing and market value management by listed enterprises. Both aspects are economic considerations at present. Mainland-based Chinese enterprises will also have to weigh up the political side of listing in the US if they want to go public there.
Third, Washington’s global strategic adjustment will no doubt affect Asia. As the US tightens its “containment” of China in the Western Pacific region, China’s neighbors in East Asia and Southeast Asia will feel the squeeze sooner or later in terms of geopolitical maneuvering between the two “giants”. That means mainland-based Chinese enterprises will have to consider international politics when they contemplate listing in the region.
All things considered, Hong Kong and mainland stock markets should speed up and strengthen their cooperation in response to a fast changing global economic, financial and political landscape.
(The author is a senior research fellow of China Everbright Holdings)
(Published on Page 7, China Daily Hong Kong Edition, March 28, 2018)