BOSSES at Hong Kong Exchanges and Clearing (HKEX) ought to be feeling smug. In five of the past eight years it has been the world’s leading exchange for initial public offerings (IPOs). Chinese companies have swarmed to list on its comparatively mature, open and transparent capital market, generating over 90% of the funds raised there in the past five years. Yet, launching a long-awaited consultation on reforms on June 16th, HKEX warned of “stagnation” if it does not change. It has one eye on its regional rivals. Last year Singapore knocked it into fourth place in a prominent ranking of financial centres. As Shenzhen and Shanghai, where trading volumes dwarf Hong Kong’s, open up, they could eat Hong Kong’s lunch.
Besides tinkering with the rules on Hong Kong’s main board and its second one, the Growth Enterprise Market, the proposed changes include, most contentiously, a third board. This would be designed to attract fizzy “new economy” technology firms. Stalwart property and finance stocks at present make up over 40% of the market.
Winning more Chinese listings is another goal. Alibaba, a Chinese e-commerce giant, left a deep scar when it chose the New York Stock Exchange for its blockbuster listing in 2014. It jilted Hong Kong because of its ban on dual-class shares, which grant some shareholders outsize voting rights. Soon after, HKEX tried to persuade Hong Kong’s Securities and Futures Commission (SFC) to allow such companies to list in Hong Kong. But corporate-governance activists and big fund managers such as BlackRock lined up against it; so did the SFC. Proponents say entrepreneurs can make good use of dual structures (think Google). Opponents argue that other shareholders lose out as a result.
Since Alibaba, a slew of Chinese tech firms have slipped through Hong Kong’s grasp. And Singapore’s exchange has launched its own consultation on dual-class shares. Cannily, HKEX is pushing for “non-standard governance features” only on the new third board. The SFC appears to be softening its stance on dual-class structures; bankers salivate over new moneymaking opportunities.
Proposed safeguards, such as stricter disclosure rules, do not convince sceptics. And the fact that the new board’s main targets would be companies from China, where business can have a whiff of the Wild West, compounds the risk to its reputation. Some also question the commercial benefits for HKEX: Graeme Lane, a broker, points out that last year daily turnover on its boards fell by 37%, despite the addition of over 100 companies.