How to fix Hong Kong’s markets
Everyone has a complaint about how Hong Kong’s markets are run, whether it is cornerstones, regulation, secret orders, or simply poor performance. How does HKEx get the environment right when everyone has a different idea of what is wrong?
|Illustration: Britt Spencer
Are Hong Kong’s markets broken? The mood of many international bankers and investors in the Special Administrative Region is miserable, with gripes ranging from cornerstones to liquidity, shorting to fictional orders in bond books. Chinese banks think it is all just fine as they gain market share. And Hong Kong’s exchange and the Securities and Futures Commission (SFC) are trying to make sense of the noise.
At the heart of the irritation for many bankers are two things: China state-owned enterprise IPOs and the ever-expanding pile of bookrunners that appear on equity deals.
The first of these complaints stems from the insistence by SASAC, the Chinese regulator for state-owned companies, that they must list at a price-to-book value of at least one, regardless of whether or not that is the valuation the market would ordinarily suggest.
To get there, they seek cornerstones and what are known as friends and family investors to buy at a price the issuers want. Get enough of these cornerstone investors – which often are in businesses wholly unrelated to the issuer – and they end up setting the price for the deal, even if that price seems artificially inflated.