Data doesn’t lie, they say. How Hong Kong’s financial community must hate that phrase.
China’s main financial centre just suffered its worst first quarter for capital raised from all initial public offerings since 2009. Just $617 million was generated by corporate issuers, according to data from Dealogic, down from $10.95 billion in the same period three years ago.
AI software firm RoboSense Technology led the way, its $136 million January stock issuance making it a decidedly medium-sized fish splashing around a miniature pond.
When the net is cast wider, to encompass all equity capital market deals, the picture somehow grows bleaker, with $1.06 billion raised. This marked by far the lowest quarterly number since 2003, a year that saw the financial sector thrown into disarray by the Sars pandemic, a less damaging and more localised Covid forerunner.
This is no one-off.
Not long ago, Hong Kong was an equity-markets leader. It ranked number one globally in terms of IPO proceeds in 2018 and 2019. In 2020 it came second, despite Covid and the last-minute cancellation of Ant Group’s planned $34.4 billion dual listing in Hong Kong and Shanghai.
Despite a Beijing-led crackdown on domestic technology firms, it remained competitive in 2021, raising $28 billion via 85 IPOs.
Since then, there has been little but bad news. The city’s stubborn insistence on adhering to Chinese president Xi Jinping’s zero-Covid policy for far too long was damaging and self-defeating. Even when Beijing belatedly reopened its borders in early 2023, neither Hong Kong’s economy nor its equity markets crackled into life.
There are so many causes for concern. Multinationals are steering clear of the city: the number of global corporates with Asia headquarters in Hong Kong is down 8.4% since 2019, according to official data, despite attempts to lure firms to the city.
Many, though not all, are US companies wary of growing tensions between Beijing and Washington.
Moreover, Hong Kong seems to be making life harder, not easier, for itself. Under chief executive John Lee Ka-Chui, legislators recently passed a new security law, the second in four years.
Hong Kong seems to be making life harder, not easier, for itself
This “threatens to further undermine the rights and freedoms of people in Hong Kong”, the US State Department has warned. Investor-friendly it is not.
The financial hub faces three main challenges. Each is substantial; not one has a simple solution.
The first is China. As the mainland goes, so goes Hong Kong. The fortunes of the two are inextricably interwoven, so when Asia’s largest economy softens, as it has since the start of last year, optimism in Hong Kong subsides.
One of the net results is that, exacerbated by a sleepy global IPO market, fewer investors are buying into new stock listings. Investment bankers constantly work and rework share sales by mainland-based firms that either do not happen or raise far less than expected.
In June 2023, Chinese payments provider Lianlian DigiTech set out plans to raise $500 million. Yet when its shares debuted in Hong Kong in March, they raised $83.9 million, or one-sixth of the total. Alibaba Group then cancelled the $1 billion listing of its logistics arm, Cainiao, citing challenging IPO conditions. A rule change by Hong Kong Exchanges and Clearing (HKEx) that lets investors ‘double dip’ – subscribe for additional shares in new IPOs under certain conditions – has so far failed to move the needle.
The second problem is Hong Kong itself. For decades, global corporate and financial institutions cited the same set of reasons for putting capital and staff to work in Hong Kong: its proximity to China, its large English-speaking population, free-and-open society and adherence to the rule of law.
With foreign talent leaving and anti-sedition laws threatening to impinge on freedom of thought, opinion and action, only the first of those factors can be consistently relied upon.
In the US-based Cato Institute’s 2023 Human Freedom Index, which measures personal, civil and economic freedoms by country or territory, Hong Kong ranked 46th – down 17 places in a year, and below the likes of Georgia and Montenegro.
The final problem is that of financial regulators’ longstanding struggle to entice non-China issuers. This is not for want of trying. HKEx officials regularly visit cities in southeast Asia and the Middle East, to market Hong Kong’s credentials.
“They seem to be here every month,” a senior Dubai-based investment banker tells Euromoney.
But so far, that effort isn’t garnering results.
UAE-based firms favour a listing in Dubai or Abu Dhabi. Indian corporates like to sell shares in Mumbai, where the love is greatest. The same is true from Saudi Arabia to Indonesia. It is hard to see how this will change.
There are always reasons for hope. Sooner or later, China’s economy will surely snap back into life. And when it does “it will do so violently”, says a veteran banker.
But that sentiment exists more in hope than in expectation and will not automatically lead to the kind of sharp uptick in activity that Hong Kong investment bankers crave. So, for now, the city’s IPO slump continues. At what point does it become irreversible?
