Mainland firms delisting from HK Stock Exchange - does it matter?
Updated: 2016-10-03 11:40
By Tim Collard(HK Edition)
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Tim Collard writes that the recent retreat of some mainland firms from HK should not be interpreted as a lack of confidence in the city's markets
We are all aware that the mainland stock exchanges suffered considerable turbulence last summer, and that subsequently they stabilized, as one would expect in a basically sound economy. However, in the wake of that bumpy ride, it is clear that a number of mainland-based companies are rethinking their decision to list in Hong Kong and are taking themselves private, possibly with the intention of reinventing themselves in the rather more volatile - and potentially more lucrative - stock markets of Shanghai and Shenzhen. Why is this, and what does it signify?
The largest company which has adhered to this trend is Dalian Wanda. Wanda is a truly colossal company: Dating only from 1988, it now operates prominently in the fields of commercial property, culture and tourism, e-commerce and large-scale retail, with its subsidiary Dalian Wanda Commercial Properties featuring as the world's biggest private property developer, with malls all over the mainland. But this summer, after only two years listed in Hong Kong, owner Wang Jianlin announced that he was going to take it private again by buying up Hong Kong shareholdings.
Obviously one factor is that the days when a company had to be listed on a long-established stock exchange to be considered as a major player are long over: The mainland markets have established themselves as full players on the international stage. However, we still have not reached the point of full currency convertibility, so there is still a sense in which one can protect oneself against global volatility by staying behind the mainland's protective wall. This strategy proved itself admirably at the time of the 2007-08 financial crisis, in which China was quite well-protected from the general global disaster.
The main perceived reason for the delisting of some large mainland companies is the persistent discrepancy between the share prices quoted on the Hong Kong Stock Exchange and those in Shanghai and Shenzhen, which tend to be significantly higher. At first glance this looks absurd: How can the same share of the same company be worth one price in Hong Kong and another price on the mainland? But we can see that it is so: Valuations of the Hong Kong-traded H-shares of mainland companies are at a considerable discount to the same companies' mainland-listed A-shares. This renders Hong Kong a less attractive place to source secondary funding: Mainland public offerings usually raise significantly more money than those in Hong Kong.
One major reason for this discrepancy is the tighter controls over capital flows which form part of the mainland's financial defense mechanisms as mentioned above. These place a premium on stock acquisition for wealth managers, which leads to an unusually high demand for available stocks, driving prices upward.
The danger here, of course, is that if stocks are seen to be overvalued then predictions will reflect that. Stock prices need to be viewed not just in the immediate term - that is, from a trader's perspective - but over the longer term, from the investor's perspective. Dalian Wanda's stock price initially improved following the 2014 IPO, but it has languished in the interim. It is likely that the delisting - and subsequent relisting on the mainland - is immediately aimed at raising a substantial sum for the company's current main property development project, a huge complex at Nine Elms, just south of the Thames River in London. It is quite natural for a company to change tactics in light of short-term needs; but tactics and strategy are two different things. In the financial world circumstances can change very quickly and companies must move fast accordingly to keep up. It may well be that things will change again and that the long-established methodology and expertise of the Hong Kong stock market will once again prove more attractive to the big players in the economy of China as a whole.
The important thing is that Hong Kong is still there and functioning in its established role as China's earliest and best-established gateway to the world. There is no room for complacency: There is no reason at all why Hong Kong cannot be overtaken by competitors if the SAR takes its eye off the ball. But, as far as experience, technology and human capital go, the territory is still excellently placed to compete at the very top level.
And so this year's tendency for mainland firms to reconsider their listings in Hong Kong should not be seen as a general expression of a lack of confidence in the future of Hong Kong markets. It is probably a short-term trend which will correct itself when market conditions indicate. But, nonetheless, the worries caused by this tendency show how vulnerable Hong Kong remains to changes of perception and sentiment in the mainland economy, and how the territory will have to look to its laurels all the more assiduously in the immediate future.
The author is a sinologist and former British diplomat in Beijing for nine years. He now works as a freelance commentator and writer.
(HK Edition 10/03/2016 page6)