Hullabaloo over new mainland issues masks lowering of standards
ONE OF THE things I cannot understand in all the hullabaloo about getting new issues from the mainland listed on our stock market is the way so many people think it brings great benefit to Hong Kong.
It does get us a high profile in the financial press, I shall grant you. The financial press has a way of thinking about these things as investment bankers do and there is no doubt that investment banks benefit hugely from bringing new issues to the market. Thus when they rate markets by how much new money has been raised on each over the past year, we tend to think it a rating that has merit for the rest of us too.
I shall also grant you that it can be interesting to see Singapore bidding furiously for new issues on its market only to draw consistently far less money than Hong Kong. A little Singapore bashing is always good for a tickle. The chart shows you the relative standings over the past 10 years.
But what does it really bring us?
Well, I suppose our stock exchange collects more fees this way. Our stock exchange is now itself a listed company and this undoubtedly benefits its shareholders. Hip, hip, hurrah for the stock exchange shareholders.
And, yes, there are those investment banks, almost all of them local branches of big foreign banks, HSBC now included. If those new issues were not listed here, they would employ fewer people here.
We created 190,000 jobs in the Hong Kong economy over the past two years. How many fewer would we have had? Yes, fetch a microscope.
Then we get the investment analysts. If the stocks are listed here, then surely the investment analysts who cover them must also be based here.
I am not so sure. Mainland stocks are best covered in the mainland, wherever they happen to be listed, and if they are not covered in the mainland, then they may as well be covered in New York or Singapore as covered in Hong Kong.
The same goes for the associated legal and accountancy fees. Our economy undoubtedly derives some services income from these but not all that much by the time you take out the element of the work actually done outside Hong Kong.
And certainly the stockbrokers who trade these stocks need not be based here. Markets are made over the telephone these days. We may have a registry here but this does not bind the brokers here nor the big fund managers who are their principal clients.
The simple fact of the matter is that in modern financial arrangements the physical location of a registered place of listing is only a place for modern telecommunications to touch down occasionally. The money does not necessarily follow.
This is not to say that having a stock exchange brings us no benefit. A listing allows a company to raise new money more efficiently and easily than through most other channels it may have open. It also brings a better standing with bank lenders and investors generally and it gives the original owners a way of trading in their shares and diversifying their wealth.
But the point is that we benefit most when this is something the Hong Kong stock exchange does for Hong Kong companies that are active in the Hong Kong economy. We benefit much less when our stock exchange does it for companies that are not active here.
And when we pitch heavily for Hong Kong listings by companies that do not carry out their businesses here, we run a distinct danger of undermining the market for those that do.
When a corporate boss in the mainland decides to go for a listing outside the mainland, he does not much care where he lists so long as he gets a good price and a reasonable prospect of active trading in his stock. Ours is not the only exchange that fits the bill and he is likely to base his choice heavily on which one gives him the least trouble and the lowest cost.
Our exchange is thus always under pressure to lower its standards for such listings which it is induced to do anyway because the relevant authorities conceive it their duty to Beijing to make mainland listings easier. They may hotly deny that they lower their standards but they cannot really avoid doing so.
Take note here also that our regulatory authorities are always hamstrung in oversight of mainland listings as they cannot really probe in the mainland as they can at home.
Trust is a fragile precious thing and the viability of stock markets is heavily based on trust. What little we gain from mainland listings we always risk losing in the value of our stock market to its home listings.
