Julia Charlton on Bloomberg TV: Hong Kong’s IPO Market Future

Julia Charlton, Principal Partner at Charltons appeared on “Bloomberg TV: The China Show”  on 24 June 2024 with Bloomberg anchors Yvonne Man and David Ingles and fellow panelist Patrick Yip, Deloitte China. Julia discussed the reasons behind the recent performance of the Hong Kong equities market and that one of the things the HKEX could do to become more competitive is to speed up its IPO approval process. Overall, Julia remains optimistic about the future of the Hong Kong market. (Source: Bloomberg)

Yvonne: What do you think is the reason behind this push now from China for these firms to list overseas?

Filipe: Hi. Good morning. It’s very interesting to see this movement because a few years ago, China’s domestic markets, the A-shares market, it was extremely active. We had some of the biggest deals here in Asia and also globally happening either in Shanghai or Shenzhen. But there has been a clear intention to just actually change the scenario in China. A lot of those deals to Hong Kong because of reasons that are very intrinsic to China’s domestic market as well. A lot of those IPOs were sucking a lot of liquidity in the market at a time that the Chinese stocks were not doing great. Was actually there was a concern of how to shore up, how to boost and to give support and bring back confidence to the Chinese a-shares market, Just limiting and making it harder for IPOs to happen within mainland bourses would be a way to actually bring back support to those exchanges.

What we’ve seen throughout this period is like in the past, almost a year, let’s say nine months to one year, there’s been a lot of deals that were scrapped from Chinese exchanges. The pipeline there has been a lot drier. We’ve seen months with very few deals and there is an expectation that a bunch of those big names that we’re actually considering to list in the domestic market in China are now considering to come to Hong Kong. There’s been a clear indication by the authorities there that there is this intention. And of course, Hong Kong would benefit a lot from this movement.

David: Okay, Well, let’s see what the months ahead hold for us. Filipe Pacheco. They’re just setting the stage for us in with really hopefully is a stage that is about to see more deals coming into the city. For more on this, let’s bring in Patrick Yip, Deloitte’s China vice chair here with us on the set, and also Julia Charlton and partner at law firm Charlton’s. It’s very nice to see you both. Good morning. And hopefully, hopefully as good as the outlook could be.

Julia, start with you. What do you think the issue is? Why? Why has it been so dry and quiet?

Julia: Well, I think we’ve had numerous factors. We’ve had geopolitical headwinds. We’ve got economic weakness in China. We’ve got high interest rates. We’ve got a great deal of uncertainty around with elections coming up in various parts of the world. So all of this has almost been a perfect storm, I think. And when we think back to the highs of 2021 and the number of IPO’s, it all seems a bit disappointing. But Hong Kong is a resilient market. We’re still absolutely free and open where US dollar linked and a very open currency an open market. So I do hope that the seesaw sees encouragement is going to materialize into more deals.

Yvonne: And Patrick, I mean I spoke with Barney Chan from Hong Kong Exchange a few weeks ago, and that is right after we heard that message from the CCRC. And she was very optimistic. Are you foreseeing the sort of IPO rebound, a comeback in a big way?

Patrick: Yes, absolutely. I think we experienced some lows in the first half, first half of the year. But we are seeing a strong pipeline and especially with what the US House was saying, I think we’re quite optimistic about about the second half of the year.

Yvonne: We’re going to be small deals, right? Big names are going to really return to Hong Kong, correct?

Patrick: Correct. Yeah. So we are we are we are looking at potentially bigger deals that would be coming to Hong Kong because all these good things that are happening, especially encouragement from China, I think that’s very important.

David: Julia, do you do you share Patrick’s optimism?

Julia: I very much hope so. I hope the glass is half full and half empty. I’m particularly interested in the enormous amount of innovation in the sector, for example. I mean, that must be an area for growth, I think for listings. And I notice there is 18C. See this new chapter we had is listed this month, but I do hope that the exchange actually broadens its outlook in terms of listing requirements, perhaps giving more options, not always market cap options, but other types of financial metrics for companies to list so that any innovative companies and indeed all companies are actually accessing the market on a disclosure based basis.

Yvonne: They’re also, I’m sure, you know, scrutinising a lot more on what’s been going on in some of the exchanges, whether it’s Shenzhen, whether it’s Shanghai as well. Given that they’re stepping up oversight onshore, does that add to the appeal of Hong Kong in some ways for some of these Chinese firms looking to list?

Julia: It may do, but I mean, no company should be listing in Hong Kong if they have issues or they’re afraid of oversight. I mean, we should be looking at a dynamic capital market that moves quite quickly. We could, for example, improve processing times for IPOs around about seven months. It would be great if there was a bit more coordination potentially on CAC approval, which is now required, taking around five months. VII structures and new businesses are a bit of a grey area at the moment in terms of regulatory approvals. So I think a lot more certainty in markets would be very helpful.

David: And Patrick, what do you think from the Hong Kong side of things, what can regulators here do further to set the stage for a recovery, if at all?

Patrick: I think the Chapter 18C a very good beginning. I think if we could do even more along those lines, encouraging more of these I Middle East and Southeast Asian companies to come to Hong Kong, I think that will be very encouraging. And the other thing is I think investors do mostly look at two things like valuation and liquidity. So to the extent the regulators can do things to improve these two metrics. I think it will be very beneficial.

But is it almost like a chicken and egg kind of thing, right? You have more companies coming to Hong Kong to list bigger companies. Automatically, I think you improve liquidity and also hopefully valuation. So is a which comes first. Right?

Yeah. So so I think we need to doing things like both ways in parallel, trying to get more companies to come. And then regulators should try to do things to improve liquidity and valuation.

Yvonne: What about foreign companies looking at Hong Kong to list? Because we’ve certainly seen some, you know, takings things private, lots of. Yeah, Samsonite’s been kind of been around the radar as well. Do you think that foreign businesses are still cautious about doing business here in Hong Kong, just given the rising tensions with China in the U.S. now?

Patrick: Yeah, I think it comes in light waves, right? Yeah. When there are like so-called bad news around and people were kind of a bit concerned. But I think recently the Hong Kong government has done a very good job in promoting Hong Kong. And then we are seeing good news right in the media about people coming back to Hong Kong. Capital flows coming back to Hong Kong and all of that. I think it creates a pretty good environment for people to start thinking, hey, Hong Kong actually is a pretty good place to be compared to the domestic market, for example, in China.

Hong Kong, for sure. We have a free port, open economy. Capital flows can come in now easily, but it is a foreign currency. I mean US dollars, a Hong Kong dollars debt free convertible. I think all of these are good things for for Hong Kong,

David: But it’s also the access to the mainland Chinese investor if you’re looking of course for big cornerstone investor. Julia, I talked to you on on the same sort of breadth, you know, the geopolitical overlay, right? It’s very conceptual most times. And I’m wondering if you’re seeing, you know, its Hong Kong’s proximity or perceived proximity, say, to to to mainland China, has that become an issue for foreign companies, you feel? How has that showed up in your work?

Julia: To some extent, But I do think there is still interest because I do think the message needs to continue to get out that actually Hong Kong is still a very open market. And listing here does not mean really subjecting a company to any particular adverse regulatory scrutiny in any way. And I think this is much more market driven. I actually think it’s quite hard for overseas companies to meet the requirements when they come here to list. The processes are quite long. They’re not terribly clear. I’m not a big fan of these different types of chapters of, you know, different letters like C and and so on, which creates sort of channel companies into particular sectors. I think it should be much more disclosure based that you meet certain requirements, certain financial metrics, and the market should decide on what companies can list. And I do think if there were faster routes to overseas companies being able to have exposure to the Hong Kong market, that might be very helpful. For example, we have Hong Kong depositary receipts, but they’re not like overseas ideas or ideas. They actually require very high levels of regulatory compliance. They’re not listings over secondary listings in other markets. And I think there’s many steps which could be taken in Hong Kong to create a much more transparent and level playing field so that companies could come here, try it out, and hopefully we would get a critical mass that I think you need with overseas companies to really achieve liquidity.

Yvonne: Yeah, you have a good point, though. I mean, we look at, you know, listing thresholds, cost time required. I mean, does that still make, you know, a venue like the US still more appealing than Hong Kong?

Julia: Right. I think it’s a factor. But I mean, the fact is that it’s a deeply liquid market, the US and that’s the biggest attraction isn’t it? It was like you were just saying chicken and egg situation.

David: Yeah. Patrick, just very, very quickly here. How much of the drought we’re feeling here is because of high interest rates, liquidity? Right. It’s sucked out a lot of liquidity out of Hong Kong when things have been much, much better if the Fed had cut rates earlier.

Patrick: Oh, I believe so. In fact, people are looking at, you know, the election in November and then there is a projection that the interest rate will come down if a certain candidate were to win and therefore things will get a lot better. In terms of capital markets perspective on here. I was also want to say is that the Hong Kong governments family office promotion, I think is also adding to these good things that are happening to the capital markets here. A lot of these, like European Middle Eastern families, know they are coming to Hong Kong to set up their family offices and then they need to find places to invest. And then the fact that Hong Kong is being so close to China. So there are going to be have they have a first hand access to these high tech air, you know, all these great companies that will come to Hong Kong to list. So I think the combination of money flowing in through the family office route, plus the potential reduction in interest rate, they all bode well for the Hong Kong stock markets going forward.

Yvonne: Real quickly, just to the maybe the two guys. Do you think Hong Kong can regain that number one spot as an IPO market once again? And when do you think that could happen? Real quick, Patrick.

Patrick: I think top three would be I’m cautiously optimistic that we can get to the top three again.

Yvonne: Top 3, Julia?

Julia: I think we’ve been in the top the top ten for many of the past ten years, so I don’t see any reason why that can’t be regained at some point.