As investor attention turns to what is likely to take Alibaba's crown as the world’s biggest-ever initial public offering, exchanges around the world are gearing up for battle.
For Hong Kong, which urgently needs a banner listing after losing its appeal as a global IPO centre for foreign companies and missing out on the Alibaba flotation, the Saudi Arabia government’s decision to float around 5% of the shares in its oil giant Saudi Aramco is heaven-sent, potentially.
And Hong Kong Exchanges & Clearing’s latest pitch for the Aramco listing – which could raise up to $100 billion – is to tie it in with its proposed ‘Primary Connect’ programme that would allow mainland Chinese investors to subscribe IPO shares in Hong Kong via a special connectivity scheme.
“Primary Connect is probably the most important if not the only reason, to secure a Saudi Aramco Hong Kong listing. And [the] Saudi Aramco listing is probably the most important and the most effective way of achieving Primary Connect,” said Charles Li, chief executive of the Hong Kong exchange, on Tuesday.
Although some recent reports citing people familiar with the IPO's progress indicate that Saudi Arabia is currently not pushing for an Asian listing but leaning towards New York, Li told a Reuters Newsmaker event in Hong Kong that HKEx’s “talk will never stop” with Saudi Aramco, China and investors.
“This is a long-term thing,” said Li, adding Saudi Aramco “can do a listing somewhere [this time], and then as soon as Primary Connect is executed, they can simply do another listing.”
And even if the oil giant chooses to list in New York or London, “having a rival liquidity pool that is supported by domestic Chinese liquidity that trades and invests at a very different valuation and risk profile allows [Saudi Aramco] to walk on two legs globally at different clocks of trading,” Li said.
In an August 28 research report HKEx said “given the sheer size of mainland domestic savings and business opportunities in China, a listing in Hong Kong under southbound primary equity connect is believed to be attractive to international companies in consideration of sizable IPOs and companies with business development strategies in China.”
According to Li, executing the Primary Connect programme and luring Saudi Aramco to Hong Kong have the best chance of success if the two plans are combined.
Primary Connect is the “next big deal” for Li, who has led the expansion of a series of "connect" schemes involving stock and fixed income markets. And the timing of the Saudi Aramco IPO couldn't be better since it could help coax Chinese regulators into okaying the latest market initiative.
For China, the political and economic gains couldn't be clearer. Reportedly poised already to launch a new renminbi-denominated crude oil benchmark via the Shanghai International Energy Exchange, China could benefit doubly by having another potential oil hedge during Asian hours, on its doorstep.
Were oil prices to go up, then China – the biggest crude oil-importing economy in the world – would likely suffer. But by allowing Chinese investors to invest in the biggest oil company and to benefit as higher oil prices lift its share price, then it’s “a natural hedge for China”, Li said.
For Saudi Aramco, and Saudi Arabia more broadly, there are also major political and economic gains to be had.
According to Li, Saudi Aramco “has a huge need of essentially having one of its largest customers – China is now the largest importer of Saudi crude oil – to be its shareholder, because that allows Saudi to really tie up its customer and shareholder relationship together.”
More importantly, under the connect programme, “we are able to use renminbi to subscribe [to] Saudi [Aramco] shares, and Saudi [Aramco] can use the renminbi to buy China sovereign treasury bills. That sort of swap allows Saudi Arabia, through its Vision 2030, to essentially diversify from [focusing on] energy, from the US dollar and from a pure geopolitical relationship in North America,” he said.
When asked about the progress of the Primary Connect, Li said it “is probably so big and so difficult to execute”.
“It requires us to change, [and] particularly the domestic policy makers need to fully appreciate and understand…as to why we are doing this,” Li said.
