Since the middle of the last decade Hong Kong has become a popular market for fund raising.
Equity capital market
In several recent years, Hong Kong’s equity capital market has raised the most new funds from IPOs, in some of those years raising more than London and New York combined.
A global finance centre
There were a number of massive listings in the market before the financial crisis, notably of state owned Chinese banks. These gave a strong impetus to the emergence of Hong Kong as a key financial centre. A further important development in 2007 was the opening of the local market to international listings beyond the traditionally accepted jurisdictions of Hong Kong, the Cayman Islands and Bermuda and (since the early 1990s) mainland People’s Republic of China.
This opening up had a relatively slow start because of the financial crisis but from 2009 started to move more rapidly, with some emphasis on natural resource and luxury goods companies. In 2009 the primary listing of the aluminium company RUSAL (incorporated in Jersey) took place, and subsequently other companies such as the Italian fashion company Prada and also L’Occitaine and Samsonite (incorporated in Luxembourg) listed in Hong Kong. In Glencore’s listing in 2011 the primary listing was in London but a substantial amount of cash was raised on the Hong Kong market.
There have also been a number of secondary listings in the market by way of introduction without raising new cash, by companies like Vale and Coach.
The regulatory environment
The reasons for the raised profile of Hong Kong as a capital market have not in any significant way included regulatory arbitrage. In fact the nature of Hong Kong’s regulatory regime and in particular a degree of regulatory conservatism (driven largely by a desire to protect significant retail investor participation in the market) has resulted in the jurisdiction being less competitive in terms of attracting certain types of IPO i.e. companies where the controlling shareholders wish to have weighted voting rights or other types of less usual control and/or governance structures - Alibaba being the most prominent recent example. There is currently a debate going on in Hong Kong as to whether that approach should be changed.
Rather, the development of the market in terms of listings of foreign companies has been driven by the liquidity that is in the region and the importance of China to many of these companies - so for the fashion companies for example there has also been the factor of a raised profile in what is a hugely important region.
One difficulty specific to listing of Chinese businesses has been the regulatory constraints on private companies with businesses based in mainland China coming to the market. In 2006, regulations (issued in “Document No.10”) were tightened against certain offshore restructurings of holdings of private businesses operating in China which had previously been used. The alternative route to a Hong Kong listing of an offshore listing vehicle for China based businesses owned by mainland Chinese is to do H share listings (i.e. of mainland China incorporated companies rather than with an offshore holding structure). The application process for getting mainland China regulatory approval to come to the Hong Kong market has recently been somewhat simplified. However the process for obtaining approval of such listings from the China Securities Regulatory Commission remains complicated and inevitably state owned companies tend to receive more attention in this process.
One area that has recently been under the spotlight is the potential impact of the draft Foreign Investment Law released by the Ministry of Commerce in mid- January 2015 on companies seeking to list Chinese businesses that are subject to foreign investment restrictions. Currently, it is common for companies to adopt variable interest entity (VIE) structures to get around foreign investment restrictions. The draft Foreign Investment Law suggests that investments held under VIE structures would either be strictly prohibited or be subject to governmental approval and onerous reporting requirements unless the underlying businesses are not within the list of prohibited/restricted industries or the investments are shown to be actually controlled by Chinese investors. This would have serious implications on companies with such structures which are currently listed in Hong Kong (and overseas) as well as companies that are planning to seek a listing in Hong Kong with such structures.
In 2012, Hong Kong ranked fourth worldwide in terms of new listing proceeds, with 62 IPOs raising approximately HK$90 billion - a substantial drop from the massive figures of some previous years. There was a pick up in volume in 2013 with 102 IPOs closed raising approximately HK$169 billion. That continued into 2014 with around HK$228 billion raised by 122 IPOs, putting Hong Kong in second place behind the New York Stock Exchange. Most of the successful listings in the current environment have been of mid-market companies, although recently some major listings have taken place, notably Dalian Wanda at the end of 2014.
Despite a slowing in the growth rate of China’s economy, there has been considerable recent bullishness in the Shanghai market which has started to impact on the performance of the Hong Kong stock market. There was much anticipation of the “Stock Connect” scheme which commenced in November 2014. In addition to providing another route into the Shanghai stock market for foreign investors (including now retail investors) this has opened up an official channel for investment by mainland investors into the Hong Kong market. This is a significant development.
Listed foreign companies in Hong Kong
While the market for listing foreign companies in Hong Kong has been relatively cool recently, we are confident that such listings are a feature of the market that is going to grow in the long term. The current regime, essentially, is that in order to list a company from a “new” jurisdiction (which then to a large extent sets a precedent) the local regulators require to be satisfied that the laws of that jurisdiction provide comparable investor protection to Hong Kong (or, to the extent not, that this can effectively be dealt with by suitable provisions in the company’s constitutional documents). To date legal entities from twenty one new jurisdictions (in addition to the traditional four), including for example Australia, Brazil, California, various provinces of Canada, Delaware, England and Wales, France, Germany, Italy, Japan, Korea and Luxembourg have been accepted as suitable for listing purposes in Hong Kong, subject to making certain amendments to constitutional documents where appropriate.
Also “Stock Connect” is a huge, though initially contained, step towards internationalising mainland PRC capital markets, and signifies the important role which Hong Kong plays in this process. However, the Renminbi (“RMB”) remains a closed currency for capital transfers and there has yet to be any framework put in place for listing foreign companies on the mainland stock markets. It is likely that for some considerable time to come, Hong Kong will remain China’s only international capital raising centre open to foreign listings. Although Stock Connect is in the nature of a pilot programme subject to monetary caps, it represents a major step forward in terms of liberalisation and it is likely that the prospect of being able to access the investor base in mainland China will add to the appeal of Hong Kong as a listing destination. There is expectation that the parameters of Stock Connect will be progressively widened, including by extending the scheme to the Shenzhen stock market.
Debt capital market
Hong Kong’s debt capital market has experienced substantial and rapid growth in the past few years. The wide range of product offerings, coupled with open access for issuers and investors, both domestic and international, and the increasing significance of offshore RMB bond issuances in Hong Kong, make Hong Kong’s debt capital market one of the most liquid and active international markets in the region.
In recent years, with the easing of monetary policy in the United States, Europe and Japan, the market has witnessed an increasing number of companies which have entered the debt capital market, including PRC- based companies taking advantage of the lower funding costs relative to the onshore market. Many companies which have traditionally relied on loan financing have become more willing to tap the debt capital market as an alternative source of funding.
Historically, the market has been dominated by US dollar issues but in addition to US and Hong Kong dollar issues, increasingly bonds denominated in other currencies are being issued, including the Euro, Singapore dollar and RMB.
Listing bonds in Hong Kong
The Hong Kong listed bond market has grown substantially in recent years. One of the criteria for investment for some investors, such as institutional funds, is to invest in listed securities. Therefore, the listing of debt securities in Hong Kong has helped to broaden the investor base for bond issuances and provided a viable financing option for many issuers.
According to the Hong Kong stock exchange, for the year ended 31 December 2014, there were 281 newly listed debt securities on the Hong Kong stock exchange and the amount raised was approximately HK$961 billion. As at 31 December 2014, there were a total of 640 debt securities listed on the Hong Kong stock exchange.
Most of the debt securities listed on the Hong Kong stock exchange are targeted at the professional investors market. In 2011, the Hong Kong stock exchange simplified and streamlined the application and approval procedures for listing of debt securities issued to professional investors. These are now relatively simple and straightforward. In addition, the Hong Kong stock exchange no longer pre-vets the contents of the listing documents, and formal approval by the Listing Committee is no longer required. The simplified listing process has brought the Hong Kong stock exchange more in line with the requirements of other stock exchanges in the region and provided an attractive listing venue for debt securities.
Development of the offshore RMB bond market
Offshore RMB bonds (or so called “dim sum” bonds, named after the bite-sized dishes served on trolleys in Cantonese restaurants) have taken an increasing share of offshore capital since the inception of the market for such instruments in 2007, when the PRC authorities first gave the green light for the issuance of offshore bonds by mainland financial institutions. Since then, the offshore RMB bond market has undergone remarkable growth and development.
In 2009, the PRC’s Ministry of Finance (“MOF”) issued the first sovereign offshore RMB bonds in Hong Kong, which supported the development of this market. Since then, MOF has increased the regularity of issuance of offshore RMB bonds in Hong Kong. The value of issuance of sovereign RMB bonds in Hong Kong by the MOF has increased from RMB 6 billion in 2009 to RMB 28 billion in 2014. These sovereign bonds provide an attractive investment channel for the increasing pool of RMB deposits sitting in Hong Kong. Over the years, MOF has optimised its offering structure by providing a greater variety of tenure, issuing bonds up to a term of 30 years in a recent offering. The larger scale of issuance and longer maturity of these sovereign bonds provide more calibration in setting the benchmark yield curve for the offshore RMB bond market. In addition to retail investors, some tranches of the sovereign bonds have been sold to institutional investors, as well as central banks and other monetary authorities.
In 2009, the PRC authorities authorised the issuance of offshore RMB bonds by a second group of issuers comprising financial institutions incorporated in the PRC. Since 2010, the PRC authorities have promoted the internationalisation of the RMB through further deregulation and the class of offshore RMB bond issuers has expanded to include multinational corporations, international financial institutions and non-financial corporations in the PRC. The issuer base for offshore RMB bonds has now become more diverse and comprises enterprises not only in mainland China, but also in Hong Kong and overseas, including well- known multinational corporates such as McDonald’s, BP and Caterpillar. Supranational financial institutions also joined the ranks of issuers, with the Asian Development Bank issuing offshore RMB bonds in 2010, followed by the World Bank, KfW of Germany and the Province of British Columbia, Canada.
Offshore RMB bonds have also been issued in other jurisdictions such as Taiwan, Singapore and the United Kingdom, but Hong Kong remains by far the primary market. In October 2014, the UK government became the first sovereign other than the PRC government to issue RMB-denominated sovereign bonds, which attracted widespread attention in the global market.
These recent developments illustrate the market’s strong interest and confidence in the offshore RMB bond market and lay a foundation for the offshore RMB bond market to become an important part of the international bond market.
In the early stages of the development of offshore RMB bonds, primarily plain vanilla bonds were offered by PRC financial institutions, which relied entirely on the credit of the issuer. However, as the market developed and a wider range of issuers of varying credit quality began to tap the market, more complicated structures with various forms of credit enhancement and tighter covenant packages have started to emerge.