How are China’s stock markets developing and evolving?
China equities portfolio manager May Ling Wee discusses the buoyant initial public offering (IPO) market and the impact of ‘re-shoring’ and rising cross-border flows on Chinese markets.
- Chinese stocks and IPOs have enjoyed strong demand post-COVID, with its economy back to growth since the second quarter of 2020.
- Geopolitics do not undermine the attractiveness of investing in Chinese businesses, or Chinese companies’ decision to list on US stock exchanges.
- Cross-border flows, particularly southbound are increasingly important, as is maximising value from where IPOs are listed.
- ‘Re-shoring’ of Chinese stocks is changing the composition of the Hong Kong market, mirroring the evolving Chinese economy.
Demand for Chinese stocks has been strong following COVID-19. China was ‘first in and first out’ of the pandemic, which helped its economy grow above pre-COVID levels in the second quarter of 2020. Combined with a strengthening currency, these factors have provided a conducive backdrop for Chinese companies to raise capital via initial public offerings (IPOs) on the Hong Kong, domestic Shanghai/Shenzhen, and US stock exchanges in 2020 and year to date.
The attractiveness of Chinese IPOs and businesses trumps geopolitics
Rising cross-border flows, choice of market listing is key
In January 2021, southbound trading activity from China was estimated to have been around 30% of total trading in Hong Kong. While global investors typically seek out the best opportunities in the domestic markets of Shanghai and Shenzhen (northbound capital), Hong Kong and the US exchanges, China’s ‘southbound’ investors are also seeking out the best opportunities in the Hong Kong market. These cross-border flows are likely to increase over time as Chinese household financial wealth continues to grow and to find its way into both the Chinese onshore and offshore markets. At the same time, companies are also casting their capital raising nets wider, seeking listings on both the onshore markets and offshore in Hong Kong.
That said, we have also seen some companies choosing to list on the onshore markets. The rationale is that onshore markets have been known to be more receptive of much higher valuations on emerging and strategic industries than investors in the Hong Kong market. For example, Chinese auto manufacturers have selected to list on the domestic onshore markets to fund their EV ambitions. We also saw China’s leading semiconductor foundry conduct a successful public offer in Shanghai, raising around US$7.6bn last year, the largest amount raised by a single company on Chinese domestic exchanges last year. Healthy and buoyant domestic stock markets enable China’s emerging and strategic industries to fund themselves via public capital instead of solely from the state’s coffers or loans.
Conversely, healthcare companies have tended to select Hong Kong for their IPOs, where demand for high quality healthcare stocks is stronger because of the smaller universe of healthcare companies compared to onshore markets. Hong Kong has become a popular listing venue for biotech companies.
Implications on Hong Kong from ‘re-shoring’
The ‘re-shoring’ or re-listing of Chinese companies previously only listed in the US but now also listed in Hong Kong is impactful. These new economy stocks are shifting the market’s composition, from being dominated by financials, real estate, conglomerates (and previously energy and telecom) companies to one where ‘newer’ economy companies such as those within healthcare, technology and consumer-focused sectors make up more than half the total market capitalisation. These highly traded stocks account for an increasingly larger proportion of market turnover, compared with Hong Kong’s ‘old’ economy shares that are typically held for longer for their provision of dividends and income. The make-up of Hong Kong’s market, now largely represented by technology, consumer-facing businesses and service industries is reflective of China’s progression from a fledging, industrialising economy some 30 years ago to the more developed and maturing economy that it is today.