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Friday, March 17, 2017, 22:28

Fading hopes for Aramco bid raise alarm

By Luo Weiteng in Beijing

Fading hopes for Aramco bid raise alarm

The reported dismissal of the Hong Kong Stock Exchange as a venue for the massive prospective listing by the world’s biggest oil firm Saudi Aramco underlined deep-rooted problems with the city’s bourse, market role players warned.

A cluster of global stock exchanges including New York, London, Toronto, Shanghai, Hong Kong, Singapore and Tokyo are vying to host the oil firm’s initial public offering.

Besides Saudi Arabia’s domestic stock exchange in Riyadh, at least one international bourse could win the world’s largest-ever IPO, which Saudi officials expect will value the entire oil giant at a minimum of $2 trillion. A market estimate compiled by regional investment bank EFG Hermes put the value at no more than $1.5 trillion, however.

In a sign of Hong Kong’s determination to have a slice of the record-smashing IPO, Charles Li Xiaojia, chief executive of Hong Kong Exchanges and Clearing Ltd (HKEx), hailed it as “a match made in heaven” during an interview with CNBC last month.

The major concern over Hong Kong Stock Exchange is the relatively lackluster trading volume

Christopher Cheung Wah-fung, founder and chief executive of Hong Kong-based Christfund Securities

Saudi Arabia reportedly favors New York and London, however, making Hong Kong’s hopes for a role in the flotation a pipe dream.

Christopher Cheung Wah-fung, founder and chief executive of Hong Kong-based Christfund Securities, said: “The major concern over Hong Kong Stock Exchange is the relatively lackluster trading volume.”

Despite muted investor sentiment aborting some deals, Hong Kong retained the crown as the world largest IPO market for a second consecutive year last year.

A flurry of new listings raised HK$195.32 billion, or $25.15 billion, in Hong Kong last year, and the bourse has a market capitalization of HK$24.8 trillion but the average daily turnover remained a comparatively low HK$66.9 billion, too little to support an IPO aiming to raise $100 billion.

"Despite a roaring IPO business, the liquidity concern is a sure thing for Hong Kong, indicating that quite a few companies come to list in the territory only with the purpose of speculating rather than trading in the market,” Cheung told China Daily.

READ MORE: Key mainland investors get clearer path to IPOs in HK

"In that sense, the Securities and Futures Commission’s (SFC) plan to reform the city’s listing mechanism does make sense, at least to some extent,” he said.

The high-profile tug of war over a controversial plan to overhaul Hong Kong’s listing regime between the city’s securities watchdog, the SFC, and bourse operator HKEx just reflected that the two bodies were passing the buck to each other, he pointed out.

The deadline for a public consultation had been much delayed as the two parties waited to see the newly elected Chief Executive’s attitude toward the proposed reform.

"Regardless of the result, we really have to do something to modify the city’s listing criteria and improve the quality of the listed firms, mitigating the mounting fears that the Hong Kong Stock Exchange will be reduced to a ‘factory for shell companies’,” Cheung reckoned. “This is vital to maintaining the financial hub’s competitiveness.”

David Wong Yau-kar, chairman of the Mandatory Provident Fund Schemes Authority (MPFA) said: “Compared with New York and London bourses where sophisticated investors have a good understanding of oil stocks, Hong Kong’s equity market may fall short in this regard.”

More importantly, the city’s stock market was known for its restrictive listing regime which set a cluster of thresholds for companies to meet, including allowing for a limited number of registration places.

ALS O READ: Oil giant explores Hong Kong IPO

"Some promising companies would be barred from choosing Hong Kong as a potential location for listing and migrate with their feet to New York or London, whose disclosure-based listing system proves to be more company-friendly,” he said.

The inherent divergence between SFC and HKEx just highlighted the difficulty of striking a delicate balance between regulation and market development. What really mattered for the city’s regulators was to have a mandate to promote Hong Kong as an attractive IPO destination compared with its rivals, rather than pay too much attention to tightening their grip, Wong reckoned.

He could not say whether many of the restrictions were necessary or not. “But the point is Hong Kong is already well-regulated in many respects. Going too far is as bad as not going far enough.”

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