2022 should be a big year – the latest of many – for China’s primary equity markets, both onshore and offshore.
Why? For one thing, the ruling Party needs to figure out where its main stock market should be. For years, and rather counterintuitively – given its obsession with control – Beijing has rather muddled along, making things up as it went.
From the 1990s, many of the country’s big state firms were allowed to sell shares overseas, notably in Hong Kong and the US. Digital innovators followed suit, choosing in the main to list on the Nasdaq or the New York Stock Exchange.
It made sense. A US listing connected cool, young mainland firms with clued-in foreign investors. It enabled shareholders to transfer some of their fortunes out of the country. Plus, there was cachet of having your firm’s name running along the Nasdaq’s stock ticker.
Even when former president Donald Trump brought his own brand of China-bashing to the presidency, mainland firms continued to flock to New York. The number of US IPOs by Chinese firms rose from seven – raising a total of $2.19 billion – in 2016, to 34 and $9.2 billion respectively in 2018, and 36 and $13.5 billion in 2020, according to data from Dealogic.
But as 2021 progressed, Washington and Beijing ramped up the pressure in different ways.
In August, the SEC started to issue new rules, to force the 241 US-listed Chinese firms to reveal political and regulatory risks, and add detail about their shell company’s structure. It’s a move partly motivated by politics, but mainly by a drive for better disclosure.
‘Blacklist’
In December, Beijing said it was preparing a ‘blacklist’ to massively restrict the use of so-called ‘variable interest entities’ (VIEs). For years, it looked the other way while firms, mostly in the technology space, set up VIEs, commonly but not always in the Cayman Islands.
Many VIEs are used by mainland owner-shareholders to bulk up on foreign capital before pursuing a foreign listing, usually in New York. For years, Beijing looked the other way. Under Chinese law, VIEs are neither legal nor definitively illegal.
Analysts and bankers believe these organizations will not be banned outright, but it will get far harder for Chinese firms engaged in sensitive practices – such as accumulating reams of private data – to form new VIEs. It’s a move heavily motivated by a political system worried about the threat of data flight.
Two questions now spring to mind. Is this the beginning of the end of the US IPO dream, as young and tech-heavy Chinese firms, facing political and legislative pressure on both sides of the Pacific, choose to list elsewhere?
And if this is an inexorable shift that cannot be reversed, which non-US stock markets stand to benefit most?
The answer to the first question is: almost certainly yes. Historically, most China-US listings take place at the end of the year. Between 2017-2020, 52 of the 112 completed listings, or 46% of the total, took place between September and the end of December, Dealogic says.
That polarity reversed course in 2021, with 35 IPOs crammed into the first half – an historical record for any six-month period.
If Hong Kong does not have a standout 2022, it will be a big surprise. And if any of these firms seek to list in New York instead, it will be an even bigger one
The key sale this year was Didi’s $4.4 billion stock offering on the NYSE.
The ride-hailing giant committed a double blunder. First, its owners pushed ahead with the sale, despite warnings by the powerful Cyberspace Administration of China to wait for a full review of its data practices.
Second, it chose to list on June 29, just two days before the centenary celebrations of the Chinese Communist Party.
Didi’s life as a listed company has been a disaster. Its shares were trading at $5.63 on December 23, sharply down from its listing price of $14. Yet that is now irrelevant: earlier in the month, the firm said it would delist from the NYSE and lay the groundwork for re-listing in Hong Kong.
Just one IPO of any meaningful size has taken place since. LianBio raised $325 million on October 31, but its shares have since slumped sharply. On December 23, they were trading at $7.44, down 53.5% from their listing price of $16.
LianBio was founded by a US private equity firm, is incorporated in the Caymans, and has dual headquarters in Shanghai and New Jersey. It’s a classic VIE, and just the kind of vehicle Beijing wants to marginalize and possibly eliminate.
So, if New York is no longer a viable listing destination for most and perhaps all mainland firms, where will they head instead?
Let’s ignore the new small and medium-sized enterprise (SME)-focused Beijing Stock Exchange, a pet project of the president, and Shenzhen’s main bourse, and focus on Shanghai and Hong Kong.
Shanghai
Both have drawbacks. The Shanghai Stock Exchange (SSE) has had a stellar year. At the time of writing, China Mobile was finalizing what is set to be the second-largest global IPO of 2021, with the wireless carrier expected to raise around $8.78 billion. It was delisted from the NYSE earlier this year, under an investment ban introduced by Trump.
But the SSE and its sibling, the Nasdaq-style Star Market, are both works in progress. They lack liquidity and sophisticated investors. Many of the bigger stock offerings are bolstered by heavy support from big state firms.
When China Telecom – another recent New York divorcee – sold $7.3 billion worth of shares in Shanghai in August, it secured support from 20 strategic investors, among them State Grid Corporation and China Development Bank’s China-Africa Development Fund.
That isn’t the mark of a sophisticated capital market.
Hong Kong
Hong Kong’s problems are rather different. It should benefit from rising US-China tensions, and it likely will: it’s hard to find an investment banker in the city who isn’t working flat-out on a dozen initial stock offerings, all scheduled for 2022.
But it hasn’t been a great year for the city’s main bourse. A Beijing-led crackdown on sectors ranging from gaming to private education hasn’t helped. Neither, one suspects, has the city’s ultra-strict rules that force arrivals to quarantine for three weeks.
The Hong Kong Stock Exchange is set to end 2021 as only the world’s fourth largest destination for IPOs, having completed 111 IPOs worth a total of $45.6 billion in the year to December 23, down 23% in volume terms year-on-year. The second half of the year has been marked by surprisingly long stretches of inactivity.
It hasn’t helped that companies listed this year are, at the time of writing, down by an average of 20% on their listing price, against gains of 32% in India, 40% in South Korea and 86% in mainland China.
More exciting new firms are being created in China – in everything from hydrogen to pharmaceuticals to autonomous cars – than ever before. Hungry for capital, they will turn to the equity markets for succour.
If Hong Kong does not have a standout 2022, with innovative mainland firms flocking to the offshore financial centre to raise money from Chinese and global investors, it will be a big surprise. And if any of these firms seek to list in New York instead, it will be an even bigger one.
