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Julia Charlton – Thoughts on Hong Kong 2020 vs 2019 and the Impact of the Coronavirus

Hong Kong has faced an uncertain start to the Year of the Rat in 2020, with the coronavirus situation worldwide evolving daily, Hong Kong is currently coping adequately but suffering significant economic impact, particularly in the retail, tourist, hospitality and leisure industries. The Hong Kong Government has introduced a HK$30 billion package of relief measures, targeted in part at these sectors (https://www.legco.gov.hk/yr19-20/english/fc/fc/papers/f19-46e.pdf). On 26th February 2020, Hong Kong’s Financial Secretary announced further budgetary measures for Hong Kong aimed at general economic stimulus.

Concerns regarding the erosion of the independence of Hong Kong’s judiciary proved ill-founded in 2019 in the light of a series of judgments indicating a lack of bias and the rule of law held up well.  Generally, despite a turbulent year in terms of disturbances in Hong Kong and US-China trade tensions, 2019 was a relatively successful year for Hong Kong, although the outbreak of the coronavirus has meant an uncertain start to 2020. Below is a summary of some market developments in Hong Kong in 2019 and some thoughts on 2020 so far! 

  • HKEx

    With the imposition of travel and other restrictions in China related to the  coronavirus outbreak, the HKEx and SFC issued a Joint Statement on 4 February 2020 providing guidance to listed companies and their auditors on what they should do if these restrictions will prevent them publishing their financial results within the deadlines imposed by the Listing Rules.

  • HKEx IPOs

    • 2020 was heralded as another strong year for Hong Kong IPOs, but clearly this optimism has given way to uncertainty. In December 2019, KPMG predicted that IPOs would raise around HK$300 billion in 2020, while EY expected HK$350 billion of IPOs if HKEx succeeded in attracting any mega IPOs, and around HK$220 billion, if not.

    • January 2020 saw a relatively strong start to the year with around 20 new listings on the Main Board of the HKEx (vs. 12 in January 2019), and 2 listings on GEM (vs. 1 in January 2019).  Following news of the coronavirus in late January 2020, there have been no GEM listings and two Main Board listings in February 2020   (vs. 9 listings in February 2019 full month). One of these was Fu Shek Financial Holdings Limited which successfully listed on 19 February 2020 129.35 times over-subscribed in the public offering – Charltons advised the sponsor, Vinco Capital Limited, and the underwriters. 

    • Following the success of Alibaba’s secondary listing on the HKEx in 2019, a number of other New York-listed China tech giants (including CTrip, NetEase and Baidu) have been rumoured to be considering following suit against a background of increased US scrutiny of Chinese companies. The number of Chinese companies which listed in New York dropped 25% in 2019 compared to 2018 due in part to tighter listing requirements on Nasdaq which prevent the listing of small Chinese companies. HKEx has also published a consultation paper on allowing corporates to hold weighted voting rights – holders are currently restricted to individuals who are directors who have played a material role in the company’s growth. The reform would pave the way for Chinese tech companies with corporate holders of WVRs to primary list on HKEx, or in the case of companies already listed on the NYSE or Nasdaq, to secondary list in Hong Kong.  The cut-off date for responding to the consultation is 1 May, 2020.

    • The Hang Seng Indexes Company also issued a consultation paper on allowing companies with weighted voting rights, such as Xiaomi, the Chinese smartphone manufacturer which listed on HKEx in 2018, and secondary-listed companies such as Alibaba Group Holdings, to be included in the Hang Seng Index.  It also seeks views on capping the weighting of the financial sector. The consultation period is open until 13 March, 2020. If adopted, the proposals would allow the inclusion in the HSI of Chinese tech companies with either primary or secondary listings on HKEx.

    • New economy companies including those in technology, media and telecommunications, as well as healthcare and life sciences companies, are expected to continue to drive IPOs on HKEx in 2020.

    • In November 2019, China’s CSRC announced plans to implement its H-share full circulation programme which allows the major shareholders of H-share companies to convert their domestic unlisted shares into H-shares for listing and trading on HKEx. Previously, domestic shares owned by major shareholders were not permitted to trade to prevent insider dealing and a reduction in the state’s ownership of offshore listed companies. H-share companies already listed on HKEx (other than companies dual-listed in the Mainland and Hong Kong such as ICBC and Ping An Insurance), and companies applying for an H-share listing, are now able to apply for full circulation. The programme will apply to 160 H-share companies. H-share full circulation is a step towards enabling state investors to reduce their holdings in these companies and its benefits should include improved liquidity, alignment of the interests of major and small investors, and improved corporate governance.

  • China-Hong Kong Stock Connect

    • Northbound trading is expected to increase following the MSCI’s increase in the weighting of China A-shares and the FTSE’s phased introduction of A shares which commenced on 24 June 2019 and will be completed on 23 March 2020 (for further details, see FTSE Russell’s June 2019 announcement).

    • Southbound trade is expected to receive a boost from the inclusion of Weighted Voting Rights companies as eligible companies in 2019.

  • Funds

    • Hong Kong’s regulators will continue to encourage Hong Kong’s development as an onshore asset management hub and fund domicile. HKEx has also set itself the goal of being Asia’s premier ETF issuance and trading hub.

    • Three new ETFs by Mirae Asset Global Investments (Hong Kong) Limited were listed on 17 January 2020 (vs. no ETF listing in January 2019). Hong Kong and Mainland Chinese securities regulators have also resumed talks about an ETF Connect, after the plan was temporarily shelved in 2018.

  • 2019

    • Looking back at 2019, the HKEx  was the world’s top IPO fundraising platform in 2019 for the 2nd year running, and the 6th time in 10 years.

    • IPOs on HKEx raised HK$312.9 billion (US$40.3 billion), US$11 billion more than Nasdaq and Saudi’s Tadawul Exchange with IPO funds raised of US$27.5 billion and US$25.6 billion, respectively.  In 4th place, IPOs on the NYSE raised US$23.4 billion, while the Shanghai Stock Exchange and Shanghai Star Market ranked 5th and 6th, respectively, with IPO funds of US$13.3 billion and US$9.5 billion, ahead of London which raised US$7 billion in IPO funds for the year.

    • HKEx’s Main Board listed a record 145 companies, including 2 of the world’s 10 largest IPOs of 2019: Alibaba Group Holding’s US$12.9 billion secondary listing on HKEx was the year’s 2nd largest IPO globally after Saudi Aramco’s Saudi listing, while Budweiser Brewing Company’s US$ 5.8 billion IPO was the world’s 4th largest IPO of the year.

    • HKEx’s 2018 listing reforms bore fruit: Alibaba was the first company to secondary list under the 2018 rules for secondary listing qualifying issuers (Chapter 19C), and the 3rd weighted voting rights company to list. 2019 also saw 9 IPOs by pre-revenue biotech companies under new Chapter 18A, raising HK$15.4 billion in total.

    • The Technology, Media and Telecoms sector led the field raising HK$110.2 billion, followed by Consumer Markets and Healthcare and Life Sciences.

  • HKEx Listing Rule Changes

    During 2019, the HKEx:

  • Corporate Governance

  • Hong Kong Debt Market

    • Hong Kong is the 3rd largest bond market in Asia ex Japan. In 2019, 420 debt listings on HKEx raised HK$1,402 billion.

    • HKEx consulted on amendments to its listing regime for debt securities issued only to professional investors in December 2019. The amendments are aimed primarily at preventing retail investors acquiring debt securities in the secondary market which are intended for the professionals market. HKEx also proposes to raise the qualifying criteria for debt issuers. For details, please see Charltons’ January 2020 newsletter “HKEx Consults on Amendments to the Chapter 37 Professional Debt Regime”.
    • Hong Kong has become a leader in the green bond market and established the Green Bond Framework for the issue of Government bonds to fund projects that will improve the environment and facilitate the transition to a low carbon economy.

  • China-Hong Kong Stock Connect

    • 5 years after its launch, Stock Connect saw record Northbound trade valued at RMB 9,757 billion in 2019 compared to RMB 4,673.8 billion in 2018. Southbound trading was HK$2,481.9 billion for the year.

  • Bond Connect

    • Northbound trading via Bond Connect in 2019 was RMB 2,633 billion, almost double the trading volume in 2018.

    • 2019 reportedly saw a huge increase in the number of institutional investors joining Bond Connect, facilitated in part by allowing institutional investors to access the Mainland’s interbank bond market through Bloomberg terminals and Bond Connect.

  • Virtual Banks

    • HKMA granted 8 virtual banking licences in 2019 to banks offering services only online, following its 2018 revision of the criteria for virtual bank authorisation. The 8 are Airstar Bank Limited, Ant Bank (Hong Kong) Limited, Fusion Bank Limited, Livi VB Limited, Ping An OneConnect Bank (Hong Kong) Limited, SC Digital Solutions Limited, Welab Bank Limited and Za Bank Limited.

  • SFC Licensed/Registered Intermediaries

    • The SFC licensed 953 corporations in the first 3 quarters of 2019 to give a total of 3,048 SFC-licensed corporations and 115 registered institutions at the end of September 2019.
  • SFC authorised funds

    • At the end of September 2019, there were 2,787 SFC-authorised collective investment schemes, including 2,209 authorised unit trusts and mutual funds, 192 MPF schemes and 11 REITS.

    • Amendments to the SFC’s Code on Unit Trusts and Mutual Funds imposing higher qualifying criteria on key operators took effect on 1 January 2019. For details, please see Charltons’ January 2019 newsletter.

  • Open-ended fund companies

    • Since the new regime for open-ended fund companies  (OFCs) came into effect on 30 July 2018, only 2 funds have been set up as private OFCs and in January 2020, 1 public OFC (with 3 sub-funds) has been authorised by the SFC.

    • In a bid to encourage more funds to domicile in Hong Kong as OFCs, the SFC proposed a number of improvements to the OFC regime in its December 2019 Consultation Paper.

    • Tax changes extending the tax benefits enjoyed by offshore private funds to onshore private funds took effect in April 2019.

  • Mutual Recognition of Funds

  • Green Funds

    • The SFC provided guidance on disclosures by green investment funds.

  • Crypto/ Virtual Assets

  • Fintech

    • HKMA’s Fintech Supervisory Sandbox established in 2016  tested 103 new technology products in 2019.