Hong Kong Exchanges & Clearing wants to launch a primary equity connect scheme that will allow foreign companies to raise funds directly from mainland Chinese investors, its chief executive officer said on Thursday.
The proposal, should it materialise, would be a significant moment for world markets as it would mean Beijing opening up more fully to capital flowing into and out of the country, allowing overseas companies to sell their shares to the nation’s cash-rich households. China had Rmb54 trillion ($8.2 trillion) in personal deposits at the end of 2015, according to the People’s Bank of China.
Speaking in Hong Kong as he presented the bourse operator's new three-year (2016-2018) strategic plan, HKEx chief Charles Li said the process for upgrading the existing legal and regulatory framework between China and the outside world is the biggest hurdle at the moment.
Hong Kong's stock exchange has already linked up with its Shanghai counterpart to provide investors with mutual access to each other's market through the launch of its pioneering Stock Connect programme in November 2014. There are also hopes that the Shenzhen market will be added at some point too. But that's for shares that are already publicly traded.
“The Stock Connect, which is largely secondary in nature, permits companies to do rights issues, which is the only element of being a primary issue,” said Li. “Whether that opening can be expanded to include actual issuance of new shares outside the context of rights issue is a big regulatory discussion.”
The establishment of Shanghai-Hong Kong Stock Connect represents a key Chinese step towards the liberalisation of the country's capital markets and gives foreign investors access to mainland China-listed shares for the first time, without need for a special licence.
The HKEx had planned to launch a similar programme with the Shenzhen Stock Exchange last year but that idea was put on the backburner as shares crashed in the summer. The Shanghai and Shenzhen Composite indexes shed 44% and 41%, respectively, from their mid-June peaks.
Li's so-called IPO Connect would potentially enable non-Chinese initial public offerings and other share sales to be sold in China and vice versa.
New third board
In addition to an IPO connect scheme, the HKEx is also looking to build a new listing venue that could host the shares of technology and innovative companies.
“A new board may allow us to have new rules for new companies to raise funds. But this is my idea. The Securities and Futures Commission will make the decision,” Li said.
Li launched a market consultation on the introduction of a dual-share structure last year but the proposal was scrapped after the SFC, Hong Kong’s market regulator, publicly opposed the plan.
"The Listing Committee has decided, in light of the SFC Statement, that it will not, at this time, proceed with finalising its draft proposal for discussions with stakeholders nor seek to put forward a proposal for a formal consultation as originally proposed in the Exchange announcement of 19 June 2015. It will, however, keep this matter under review," David Graham, HKEx's chief regulatory officer and head of listing, said in an October statement.
In 2014, Hong Kong rejected a request from China’s biggest e-commerce giant Alibaba to change its listing rules to accommodate companies with dual-share structures that give the company’s management and founders greater voting rights and control over the company with just a small holding of shares.
Alibaba, founded by former English teacher Jack Ma, eventually decided to choose New York for its IPO, raising a record $25 billion in September of 2014.