Is there light at the end of the tunnel for Hong Kong?

Initial public offerings in Hong Kong have fallen to levels not seen for more than a decade. REUTERS
Initial public offerings in Hong Kong have fallen to levels not seen for more than a decade. REUTERS

Summary

Proposed regulatory changes are welcome news for the city’s stock market, but they probably aren’t enough.

Hong Kong’s stock market used to be the world’s top equity fundraising venue. Not anymore: In the number one spot as recently as 2019, it didn’t even break the top five in 2023 according to Dealogic.

But the market is up 6% this week, its best performance this year, in the wake of proposed regulatory changes. In particular, comments from China’s security regulator suggesting that more big Chinese companies may be greenlighted to list in Hong Kong.

That would be welcome news—but it is probably not enough to save the patient. A durable recovery for Hong Kong’s embattled banking sector still awaits a sea change in investors’ attitude toward Chinese stocks more broadly.

Last week, Chinese securities regulators announced five measures specifically to support Hong Kong’s financial markets. Some, such as expanding the universe of instruments that mainland Chinese investors can buy through a trading link with Hong Kong called Stock Connect, would boost inflows from the north, even if they are not enough to lift the whole market.

What is particularly music to the ears of the city’s suffering bankers, however, is that China will support more “leading companies" to go public in Hong Kong. It is unclear what concrete steps Beijing will take to make this happen—and some of the largest Chinese companies are already listed in Hong Kong. But the market cheered the news anyway: This week’s rally brought the benchmark Hang Seng Index to its highest level this year.

That help is very much needed. Initial public offerings in the city have fallen to levels not seen for more than a decade—less than $1 billion so far in 2024—placing it eighth among global exchanges according to Dealogic. That compares with $52 billion for the whole of 2020.

Hong Kong Exchanges and Clearing, the operator of the city’s stock exchange, on Wednesday reported a 13% year-over-year drop in net profit for the March quarter. Apart from a dearth of new listings, trading volume has also been lackluster. Average daily turnover on the stock exchange last quarter fell 22% from a year earlier.

Some other recent regulatory tweaks could also help. China has stepped up scrutiny of IPOs in its domestic stock markets since last year. Shanghai and Shenzhen have been strong competitors to Hong Kong for new listings in recent years. But more companies may reconsider Hong Kong as it becomes harder to go public in mainland China.

Still, weak sentiment toward any stocks related to China is still the key reason companies haven’t been going public. The Hang Seng is trading at 8.8 times forward earnings, compared with its ten-year average of 12.4 times, according to FactSet. That makes Hong Kong a tough sell for companies looking to raise capital. Chinese e-commerce giant Alibaba, for example, has abandoned its plan to list its cloud and logistics units, partly due to the market environment.

And some recent companies that did manage to list in Hong Kong have been doing poorly. Bubble tea maker Sichuan Baicha Baidao—the biggest IPO there in 2024—has already lost a third of its value since it went public on Tuesday.

A slowing Chinese economy, intensifying geopolitical tensions and China’s crackdown on industries like technology and real estate have all contributed to the current malaise in Chinese stocks and in Hong Kong.

Smoothing the path for key Chinese firms to list there will help. But tinkering with regulatory rules won’t be nearly enough to revive Hong Kong’s markets on its own.

Write to Jacky Wong at jacky.wong@wsj.com

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