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2 Mainland set to overtake Hong
Kong in IPOs By Olivia Chung
HONG KONG - With the expectation of steady
revaluation of the yuan and with the bullish
sentiments in the Shanghai and Shenzhen bourses,
more and more overseas-listed Chinese companies
are expected to make their initial public
offerings (IPOs) back home. As a result, mainland
China's stock markets are expected to overtake
Hong Kong's this year in terms of accepting IPOs,
both in total number and in capitalization,
according to experts.
While officials with
the Hong Kong exchange celebrate a lucrative
2006, they are concerned
about the lack of large companies ready to list in
2007.
Hong Kong raised a record US$43.8
billion last year, surpassing New York to become
the world's second-largest market after London.
But the figure was largely attributed to IPOs of
mainland Chinese enterprises, and it would have
been a lot smaller without the Bank of China (BOC)
and the Industrial and Commercial Bank of China,
which together raised $30 billion.
Hong
Kong has been the first-choice listing destination
for mainland Chinese companies since the late
1990s. But since it has already hosted almost all
the big mainland names, it now has just a handful
of other giants to look forward to.
Meanwhile, the increased sophistication of
mainland China's capital market and a flood of
funds into the Shanghai and Shenzhen bourses,
boosted by the expectation of the yuan's
appreciation, are creating good conditions for
mainland companies listed in Hong Kong to seek
IPOs at home.
Mainland Chinese enterprises
are listed in Hong Kong in two major types -
either in H-shares or in "red chips". H-share
companies are incorporated in the mainland with
their main businesses based there. Red chips are
stocks of mainland companies incorporated and
listed in Hong Kong, but whose main businesses are
on the mainland. Most of the red chips are large
conglomerates that listed on the Hong Kong market
in the 1990s. Now H-share and red-chip giants are
both preparing to list at home.
The trend
begins with China Life Insurance, the country's
biggest insurer, which debuted on the Shanghai
Stock Exchange on Tuesday, closing at 38.89 yuan,
106% higher than the initial public offering price
of 18.88 yuan.
China Life launched its
H-share IPO on the Hong Kong Stock Exchange in
December 2003, when the bearish air had been
hovering over the A-share market for about three
years.
The success of China Life's A-share
offering came as no surprise, but China Life,
being one of the H-share companies returning home
for another listing on the yuan-denominated
A-share market, signifies the start of a new era
for China's stock markets.
Around December
2003, the China securities industry was
overcrowded and the listed companies were saddled
with poor corporate governance and battling poor
earnings, while the Shanghai Composite Index,
which tracks both yuan-denominated A-shares and
foreign-currency B-shares, was off 40% from the
record high of 2,233.59 set in June 2001.
The poor performance of China's stock
markets was partly caused by structural problems
in the market itself - one of the biggest was that
about two-thirds of the shares of China's listed
companies were non-tradable.
Although the
Chinese government pressed ahead with the sales of
state equities to the public at market prices in a
bid to deal with the root of the problem in June
2001, investors dumped the shares as they were
afraid non-tradable shares would further dampen
the market.
The sales were scrapped three
months later after share prices tumbled 30%, but
the market continued to fall.
Beside the
weak market sentiments, China's emerging domestic
stock markets have limited liquidity for large
state-owned companies to do financing.
Encouraged by Beijing's go-out strategy,
many large state-owned enterprises had chosen to
list on overseas stock exchanges such as Hong
Kong's, which maintain global disclosure and
accounting standards, to improve their corporate
governance and force officials to abide by
international public-company rules and standards.
The Shanghai Composite Index had fallen to
1,180, a new historic low, at the end of March
2005, which ironically offered a chance for the
non-tradable share reform to restart as there was
limited room for further decline.
To make
the reform go smoothly, the China Securities
Regulatory Commission (CSRC) suspended IPOs at
home. Because of the ban on IPOs, BOC, Shenhua
Energy and Bank of Communications were forced to
list in Hong Kong.
As of the end of June
2006, 350 Chinese companies listed in Hong Kong,
accounting for 41% of the bourse's total
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