Hong Kong’s Trade Enhances Its Attract for Chinese Issuers | Skadden, Arps, Slate, Meagher & Flom LLP
5 min readRegardless of the impression of COVID-19 and other recent developments in Hong Kong, the city’s position as a middle for China-centered firms to raise capital turned even far more vital in 2020. The momentum of various trends that commenced developing a calendar year back has, if nearly anything, performed out in a significantly far more pronounced manner than we expected.
Two significant tendencies emerged in late 2019:
- new secondary listings on the Hong Kong Stock Exchange (HKEX) of huge, primarily tech-associated companies that have been now mentioned in the United States and
- the expansion of HKEX’s place as a credible current market for biotech and health treatment businesses to raise funds.
Each developments stem from new HKEX policies adopted in 2018, but these improvements actually did not start to have an influence until 2020.
At the beginning of 2020, Alibaba was the only U.S.-shown business that had finished a secondary listing beneath the new policies. By the conclusion of 2020, there have been 10 so-named “homecoming IPOs” on HKEX, with concurrent community choices in Hong Kong. Among the these were the listings of JD.com and NetEase, two of the a few biggest public offerings in Hong Kong in the first 50 % of 2020. For the full 12 months, around $17 billion was elevated by such offerings.
This trend has been driven in element by regulatory developments in the U.S. In December 2020, the Holding Foreign Providers Accountable Act was signed into legislation by President Trump, prohibiting international businesses from listing on U.S. exchanges if they keep a overseas accounting firm that are not able to be inspected by the General public Enterprise Accounting Oversight Board (PCAOB) for a few consecutive yrs, commencing in 2021. Because inspection of audit firms’ performing papers in China is issue to polices in China, there is hope that the Securities and Exchange Commission and PCAOB will reach an knowing in the following a few decades with the suitable Chinese authorities on PCAOB inspection of the audit functioning papers in China. Having said that, the new legislation arrives versus the backdrop of a challenging period in the U.S.-China marriage, and Chinese regulators’ fears about nationwide safety threats are ongoing, building headwinds for any endeavours to reach an knowing. (See “US-China Trade and Enforcement Problems: What’s Following?”) A essential mass of U.S.-listed Chinese tech providers selected to avail on their own of a secondary listing in Hong Kong this yr as a contingency strategy and to produce an extra system for raising capital closer to lots of of their stakeholders, earning it far more probable that extra providers will follow.
The 2nd pattern, even additional pronounced, is the boost in pre-profits biotech corporations listing on HKEX. The 28 biotech providers now shown on HKEX experienced a collective current market capitalization of nearly $90 billion at the close of 2020, and an ecosystem of other stakeholders is expanding about them, such as traders, investigate analysts and senior executives. Contrary to some prior HKEX initiatives that have been satisfied with a more muted reaction (these as the hard work to bring in mining organizations to HKEX), the exchange’s biotech initiative has now acquired ample important mass. Offered the immediate development in wellbeing treatment-related spending in China and the sizeable room for additional progress, the favourable reception to HKEX’s biotech initiative is evidently underpinned by a additional stable macroeconomic story.
Provided the swift expansion in wellness care-similar shelling out in China and the significant area for more advancement, the constructive reception to HKEX’s biotech initiative is plainly underpinned by a additional strong macroeconomic tale.
Adding to the momentum in this sector, quite a few of HKEX’s biotech firms have seen important share price appreciation and have been in a position to perform sizeable stick to-on choices. A number of have now also long gone on to entire domestic Chinese offerings of A shares. (Chinese rules prohibit domestically traded A shares from staying exchangeable for Hong Kong or other international-outlined securities.)
To make HKEX even far more attractive to biotech organizations, in November 2020, HKEX announced an arrangement with the Shanghai and Shenzhen inventory exchanges (SSE and SZSE, respectively) that shares of pre-profits biotech firms are suitable to be traded via the Stock Connect plan. The software permits traders positioned in Shanghai and Shenzhen to trade specifically in specified HKEX-shown securities (southbound trading) when also permitting Hong Kong-based traders to trade directly in selected SSE- and SZSE-mentioned securities (northbound buying and selling). Especially, pre-income biotech corporations listed under Chapter 18A of the Hong Kong Listing Regulations that are eligible constituent stocks of the Hang Seng Composite Index, or have corresponding A shares listed on SSE or SZSE, will be integrated in southbound trading below the current Stock Link arrangements. These improvements are anticipated to get impact in early 2021.
In the meantime, HKEX has been soliciting suggestions on several amendments to its listing procedures, some of which are arguably long overdue. The proposals include amendments aimed at:
- facilitating a “paperless” initial community featuring (IPO) process, performing away with the will need to print tens of 1000’s of physical prospectuses and application varieties and earning them offered at retail lender branches during Hong Kong
- shortening the IPO settlement course of action, most substantially by reducing the exceedingly prolonged time period amongst pricing and closing for Hong Kong IPOs from five organization days to one particular
- strengthening the disciplinary powers of HKEX, for illustration by supplying HKEX with the capacity to delist firms that keep directors or officers who have overseen flagrant breaches of HKEX listing rules and
- continuing to raise the standards for original listings (including by elevating the minimal income specifications for listings on the Main Board of HKEX) and closing perceived loopholes that HKEX fears may perhaps lead to listings of companies that are or may well develop into “listed shells.”
For the previous ten years, HKEX has been the No. 1 sector globally for IPOs by money lifted. It has benefited from its market place as the only licensed trade in Hong Kong and the only sector in China where by Chinese businesses can elevate cash freely exchangeable into foreign currency. HKEX also has as an benefit its proximity to mainland China and the perception that it is the “home” industry of preference for Chinese issuers. Versus a shifting geopolitical backdrop that may perhaps carry on to favor it as a listing location, HKEX is seeking to fortify its position with China-based issuers. However, whether HKEX can turn out to be an interesting location for issuers outside of people with rapid and deep one-way links to China continues to be to be witnessed.
