Increasing international competition for China listings, most notably between London’s Alternative Investment Market (AIM) and China’s domestic markets of Shanghai and Shenzhen, is squeezing market leader Hong Kong, say insiders.
Since an unofficial ban by the China Securities and Regulator Commission (CSRC) on most domestic Chinese companies seeking a listing overseas before a domestic offering, senior officials in the Hong Kong government and senior management in the Hong Kong Stock Exchange (SEHK) have been in something of a panic, say insiders, over the potential loss of what has been a hugely lucrative listings business from the mainland.
"The stock exchange and FSTB [Financial Services and Treasury Bureau] are paranoid about losing the China listings business," says an insider. "The exchange is facing massive pressure from the government to attract more foreign listings."
Their concern is understandable. The SEHK 2006 accounts reveal that fees generated from new listings totalled some $60 million for the year, a 13% increase on 2005. More significantly, it is the drive for new listings that also generates long-term growth in turnover-related income that accounts for the bulk of SEHK revenues – some $308 million in 2006.
Any prospect of losing the China listing goldmine is therefore unthinkable. SEHK is a fully commercial enterprise as well as being the primary regulator of the stock market on which its own shares are listed. Its shareholders expect a return and its senior staff are partly compensated in stock options. Some observers question the ability of management at the SEHK to remain impartial as commercial pressures mount.
"I think it’s scandalous that some of the senior staff engaged in a regulatory environment within the exchange are rewarded with generous stock options", says an insider. "It’s clearly a huge conflict of interest."
To make matters worse, AIM has also eaten away at Hong Kong’s previous monopoly, proving especially successful at attracting smaller privately owned Chinese companies that SEHK would like to list on its own second board, the Growth Enterprise Market (GEM).
Where GEM has failed, however, is in developing the truly adviser-regulated market of AIM. There is no doubt that the regulation and red tape associated with GEM listings has driven some companies towards AIM instead.
"There’s been a lot of discussion as to what to do about GEM," says an insider. "Market participants wanted to go for an AIM-style market but the feeling was that we just don’t have the necessary advisory, institutional and regulatory infrastructure here yet to make it work properly."
If SEHK continues to feel the pinch of competition for listings from China and London, the risk is that standards and integrity could become sacrificed for the sake of commercial interest, an outcome that could have far-reaching implications.
"Hong Kong should stick to what they’re good at and not panic," says Jamie Allen, secretary general of the Asian Corporate Governance Association, "they shouldn’t drop their standards just to attract listings for China or anywhere else. If they do, its brand will suffer and the damage could be long-lasting."