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On 27 October 2017, the very best of the city’s finance pros met in the illustrious glass tower of the Stock Exchange of Hong Kong Limited (HKEX). Wearing the red jackets traditionally worn by floor traders, hundreds of locals in the fields of business and politics held a closing ceremony for the historical trading floor, which had been made obsolete by the rise in electronic trading. The ceremony was a happy ending to the 126 years of trading that took place there.
Saying goodbye to the trading floor has in no way tarnished the prestige of the HKEX, which for the past 10 years has been in the top five stock exchanges worldwide alongside the NYSE, NIKKEI, SSE and NASDAQ. “The HKEX was number one last year in funds raised during IPOs,” highlights Julia Charlton, who runs a firm that specialises in initial public offerings. “By the end of the third quarter, $31.1 billion had been raised in Hong Kong versus $25.1 billion in New York,” she adds.
The HKEX owes the bulk of its success to Chinese firms. The exchange has a number of major companies in its ranks that were created in China, such as Tencent, Lenovo, PetroChina, China Mobile and the insurer Ping An as well as banking establishments ICBC and CCB. “Of the top 20 IPOs in Hong Kong, all except one (editor’s note: Hong Kong insurer AIA) were Chinese companies,” reports an HKEX spokesperson. Chinese firms account for half of the 2,285 companies listed on the HKEX today and over two-thirds of its market capitalisation.
Why the boom? “Chinese companies choose to be listed on the HKEX because they can access a pool of international investors and capital while taking advantage of the cultural and geographic proximity of China,” says David Cheng, a local lawyer who specialises in the stock market. They also enjoy conducting business in a system in which the rules are transparent and based on the rule of law, because according to Cheng, that’s not always the case in China.
What’s more, the HKEX is now putting the connections it made in 2014 with the Shanghai and Shenzhen stock exchanges to good use. New regulations authorise investors from each stock exchange to purchase shares on the others. This reform has removed barriers for Chinese traders who were looking to invest in firms listed on the HKEX, further expanding its reach.
Additionally, procedures take effect much faster in Hong Kong. “IPOs in Hong Kong rarely take longer than six months, versus two to three years in continental China,” explains Peihao Huang, head of equity capital markets for Asia at UBS. It is worth noting that UBS, a Swiss bank that is particularly active in Asia, has sponsored 10% of the companies listed on the HKEX over the past 10 years.
ALIBABA’S LOW BLOW
However, the former British colony is experiencing increasingly intense competition from the thriving Shanghai and Shenzhen exchanges, as well as from long-standing marketplaces such those in New York and London. “Companies know they can get higher valuations if they are listed in China” reveals Cheng. “Tech firms prefer the NASDAQ – a platform which is dedicated exclusively to them.”
However, the HKEX was hit the hardest back in 2014 when Chinese e-commerce giant Alibaba decided to launch its IPO on the NYSE instead, cutting Hong Kong’s exchange out of the biggest IPO in history. Tech groups may also look to the Shanghai exchange in the future. “The Chinese government just announced that it has created a trading platform specifically for this sector,” Huang points out.
To beat the headwind, the HKEX initiated one of its most radical reforms last spring. The new regime enables companies with multiple classes of shareholding structures – a strategy that lets some shareholders, such as the company’s founders, gain more voting rights – to list in Hong Kong.
The reform was met with instant success. Over the past few months, smartphone manufacturer Xiaomi, food delivery platform Meituan-Dianping and communications tower company China Tower each launched IPOs in Hong Kong, bringing in $4.7 billion, $4.2 billion and $6.9 billion respectively.
The reform also allows biotech companies to list on the HKEX even if they aren’t generating income yet. “This benefits companies with a number of promising products in the pipeline which haven’t been able to market them yet,” says Cheng. HIV treatment manufacturer Ascletis Pharma and biosimilar specialist Innovent Biologics were among those to take advantage of the opportunity to list on the HKEX in light of its newly relaxed rules.
Despite its wild success, the HKEX has a unique problem – backdoor listings. “That’s when speculators create and list entities that are hardly more than an empty shell, and then sell them to companies that didn’t qualify for listings on the Hong Kong exchange either because they fell short of the profit threshold or because they didn’t want to wait to register three years of profitability like Hong Kong’s rules require,” explains David Cheng, a lawyer specialising in stock markets. Cheng reports that these shell companies are sold for up to HKD 500–600 million (CHF 64–76 million).
The banks in charge of checking the information submitted by companies looking to list on the HKEX have also slacked on their due diligence at times. In the autumn of 2017, China’s market watchdog singled out 15 financial establishments, investigating them for providing “poor-quality services” for a series of IPOs.
And one of them was UBS. Fastforward a few months, and UBS was hit with a fine for HKD 119 million (CHF 14 million) and its authorisation to sponsor IPOs was suspended for 18 months as a penalty for allowing China Forestry Holding – a Chinese forest development and timber company – to list in 2009. The company was delisted from the HKEX in 2011 and it is currently being liquidated.