Macro-economic factors and pace of A-share IPOs to shape outlook of Hong Kong’s new share markets
- A-share IPO market to see more frequent and larger listings
- Impact of registration-based system to be seen next year
Published: 9 April 2015
For the first time in many years, initial public offering (IPO) proceeds raised by the Shanghai Stock Exchange surpassed those of Hong Kong Stock Exchange and took over the long-standing leadership position of the New York Stock Exchange (NYSE) during the first quarter (Q1) of 2015 following the China Securities Regulatory Commission’s (CSRC) effort to expedite IPO procedures to the marketplace, according to the latest analysis of new listing markets in Hong Kong and the Chinese Mainland by the National Public Offering Group of Deloitte China. In the upcoming months, investment sentiment towards IPOs in Hong Kong would be influenced by a number of factors, including the timing of any U.S. interest rate hike, measures to address the Chinese economic slowdown, investment policies to direct Mainland funds to Hong Kong, and the volume of IPOs across the border, while the Mainland market is shifting to a new registration-based system, which has generated considerable market enthusiasm.
For the first three months of 2015, Hong Kong was off to a slower start with 25 IPOs raising HK$19.0 billion without any mega-listing over the period. Funds raised from share flotations were 59% down from the HK$46.0 billion raised during Q1 of 2014, but still exceeding the amounts raised over the same period in 2012 and 2013.
“On the one hand, the stock market of Hong Kong was volatile as it failed to shrug off worries over the prospects of an interest rate hike in the United States (U.S.). On the other hand, the market was receptive to reductions in both the interest rate and reserve requirement ratio of Chinese banks, the restructuring of the local debts and the commencement of the quantitative easing program of the European Central Bank. In return, the market has remained sufficiently strong to support the IPO activities in the territory,” commented Mr. Edward Au, Co-Leader, National Public Offering Group of Deloitte China.
At the same time, the CSRC has speeded up IPO approvals. This has contributed to the Shanghai Stock Exchange raising HK$41.8 billion (RMB33.4 billion) from 35 IPOs and the Shenzhen market generating HK$18.3 billion in proceeds (RMB14.9 billion) from 35 IPOs. These combined performances represented rises of 46% and 44% respectively from 48 IPOs and RMB33.5 billion raised by both stock exchanges over the same period of last year.
“In addition, the interest rate and reserve requirement ratio reductions of the Chinese Central Bank and the positive sentiment towards the reform of a registration-based new share issuance system increased the appetite for this larger number of IPOs in the A-share market,” said Mr. Anthony Wu, China A-Share Capital Market Leader of the National Public Offering Group, Deloitte China.
With around 50% fewer IPOs in Q1 over the same period of last year raising HK$27.3 billion, the NYSE lost its leadership in the global IPO race to the Shanghai Stock Exchange, which was significantly more active in IPO debuts.
In the next few months, greater attention to the timing and mechanism of the formal launch of a registration-based IPO system in the A-share market should continue both in Hong Kong and on the Chinese Mainland. But Mr. Au believes introducing the new regime within the year would remain uncertain as the revision of the Chinese Securities Law slightly lags behind the normal timetable of about six-to-eight months from draft to passage to official introduction. He expects the full impact of the new regime on Hong Kong would be realized next year. At the same time, he advised the time is right for Hong Kong to strengthen its positioning for a vibrant IPO market in the years to come. That would include developing the city into a mutual market in Asia.
Deloitte forecasts the seven-to-eight large IPOs expected from the Chinese financial sector and the existing pipeline would be able to help Hong Kong to complete 110 IPOs raising approximately HK$180-220 billion by end of this year. The liberalization of interest rates, emerging Internet finance, and service expansion plans of Chinese securities firms, enhancement to the Shanghai-Hong Kong Stock Connect and the anticipated launch of the Shenzhen-Hong Kong Stock Connect are important factors spurring these huge listings.
As for the A-share market, Deloitte believes it is on the way to making 260-300 new listings raising RMB150-180 billion for the year 2015. According to the applications filed with the CSRC, the market may see a large flotation from an energy and resources company. “The anticipated launch of the Shenzhen-Hong Kong Stock Connect and transfer listing mechanism from the New Third Board to ChiNext should revive the market further, which has been bullish so far this year,” added Mr. Wu.
When commenting if Hong Kong can sustain its second-place global position for the third consecutive year, or would be overtaken by Shanghai in 2015, Mr. Au said this would ultimately be determined by factors including upcoming large listings in other major stock exchanges, such as London and New York, the performance of China’s economy and the economic easing measures in China, the U.S. and the Eurozone, the IPO volume and flow on the A-share market, and timing and extent of the U.S. interest rate rises.
Notes to editor:
Unless specified otherwise, all statistics were updated to 31 March 2015. However, statistics on the number of companies under Chinese IPO review were updated to 25 March 2015.
Sources of the statistics for the Hong Kong IPO market: Hong Kong Stock Exchange, Deloitte estimates and analyses, excluding the transfer of listings from Growth Enterprise Board to the Main Board and five newly-listed companies which did not announce their stabilization actions by 31 March 2015.
Sources of the statistics for the A-share IPO market: CSRC, Deloitte estimates and analyses.