Marcus Cake

The following article summarises some significant shifts in the global financial and equity market. This is an update to articles that appear in the Stock market category and, specifically, the article Are offshore stock exchanges becoming more competitive in the internet era?.

Hong Kong leaves ASX in its wake, Sydney Morning Herald, 15th January 2007

Extract:

• The Australian market was valued at about $724 billion in April 2002, comfortably ahead of Hong Kong’s value of about $US475 billion ($609 billion). Since then China’s boom has changed things. Statistics for the year to November 2006 put Hong Kong’s value at almost $US1600 billion, well ahead of the ASX’s value of $US948 billion.




• Bloomberg calculates that the gap is even wider, with Hong Kong valued at $US2139 billion, and Australia valued at $US913 billion: Bloomberg says that Hong Kong now amounts to more than 4 per cent of the world’s market value, more than twice Australia’s 1.85 per cent share, ahead of Germany (3.5 per cent), and closing in on France (5 per cent) and London (7.7 per cent). Average daily turnover in Hong Kong in April 2002 was about $US783 million.




• Mainland Chinese floats in Hong Kong during 2006 included the biggest float in history, the $US22 billion Industrial and Commercial Bank of China share sale, which was oversubscribed a stunning 50 times, a fact that tends to end the argument that Wall Street or London floats are needed when really large amounts are being raised. Bank of China’s $US11.2 billion sale on the Hong Kong exchange was the world’s second biggest of the year, and Hong Kong topped the world league table for floats in 2006, with a total of $US41.7 billion, 17 per cent of the global total of $US227 billion.




• London came second with a 15 per cent share of the total and America followed with 11 per cent. Ernst & Young puts Australia’s share of floats at a meagre 1.6 per cent, which is about $US3.6 billion, an underestimate. Another source, the World Federation of Exchanges, gives Australia $US9.2 billion worth of floats to the end of October and one could, at a pinch, classify the $15.5 billion, $US12.1 billion, T3 sale as new money too, to make a total of $US21.3 billion, but even then, Australia is no longer in Hong Kong’s league.




• But the real story is that Hong Kong is winning mainland float business because its position as the gateway for investment into China has survived the handover and because it continues to offer the liquidity that is needed to make the float a success.




• The Hong Kong Exchange faces a challenge in the medium term from Shanghai, which hosted floats worth about $US18.7 billion in 2006. Ernst & Young predicts Shanghai will handle as much new issue volume as Hong Kong this year, partly because big Hong Kong listed mainland companies will be making new primary issues into China itself.




• But with China’s economy expanding at a 10 per cent clip and no end in sight, there’s enough going on for both exchanges to prosper. They are sitting right on top of a boom that has a continual need to create capital: as well run as it is, the ASX cannot match that, which is why last year’s merger and the rather sad strategy of straining more rent out of a monopoly is the best it could come up with.

Hong Kong raised more capital in 2006 for the largest companies than any other market. In addition, it also offers small high growth companies a better opportunity for liquidity at significantly less cost than other markets. Hong Kong’s Growth Enterprise Market, a “Buyer’s Beware” market for informed investors, is specifically designed for these small growth companies. A company does not need to be incorporated in Hong Kong and “does not include any profit ‘track record’ requirement nor any obligation to forecast future profitability”. The listing fees are modest and comparable to many offshore stock exchanges. However, I suspect that the opportunity for liquidity may be greater in Hong Kong. The listing requirements only accept companies from a small number of jurisdictions and that the company has been actively pursuing business for 24 months. If you can meet the requirements, then perhaps Hong Kong’s Growth Enterprise Market is worth exploring. I have previously highlighted the lack of liquidity in offshore exchanges, but perhaps the weight of capital in the world generally and Hong Kong specifically will boost liquidity in offshore exchanges. Ofcourse, any company that lists in Hong Kong would need Hong Kong or Chinese business to maximise appeal to local investors. I remain intrigued by the opportunity for online social networks to contribute to the stock exchanges and the equity market.