The continuing growth of the Mainland economy augurs well for Hong Kong as a centre for IPOs and other fund-raising activities by Mainland enterprises.
Large initial public offerings are always welcomed in Hong Kong, particularly when they are successful, whether measured by the degree of over-subscription or the extent of the increase in the prices of the shares on their debuts. It is also a clear confirmation of the status of Hong Kong as an international financial centre. Last week we had the Industrial and Commercial Bank of China (ICBC) IPO, which is, so far, the largest IPO in the world. The fact that this IPO and several other large IPOs were organised so successfully in Hong Kong and not in London or New York, or any other international financial centre is something that those involved in the Hong Kong Stock Exchange, the investment banks, the banking system, and the interbank payment system can justifiably be proud of. I hope this is something that the Hong Kong community, including all the investors, will be proud of too. Having watched these events closely, I think the lack of excessive volatility in the interbank rates over the course of the IPO and the absence of any hiccup in the interbank payment system on the payment and refund days are quite an achievement.
One interesting phenomenon observed during the course of the large IPO activities in Hong Kong is that, with global financial markets awash with liquidity, whenever there is new supply of quality financial instruments in a market of international standing, attracting international investment funds is not a problem. There seems no longer to be any need, for example, to organise primary or secondary listing in Europe and America in order to attract investment funds from those areas. International road shows are of course still essential to stimulate investor interest, but advanced information technology is increasingly making this easier. So I hope these large IPOs serve to consolidate the status of Hong Kong as the preferred IPO centre for Mainland enterprises.
As China becomes increasingly integrated with the rest of the world, with its economy growing at a brisk pace, made possible by reform and liberalisation, and the associated rapid increases in productivity, there will be more and more Mainland enterprises achieving success in their own fields and attaining international status. This augurs well for Hong Kong as a centre for IPOs and other fund-raising activities by Mainland enterprises, particularly those intending to go international. But, as I have mentioned before, while we are gladly playing the important role of channelling foreign funds into the hands of fund raisers on the Mainland, we must recognise the fact that the savings rate on the Mainland is still very high and therefore there is great investor demand there that needs to be satisfied. The sustainability of Hong Kong as the IPO centre for Mainland enterprises depends, I think, on whether we can satisfy investor demand on the Mainland.
The sale of quality assets by the State only to overseas investors might understandably lead to objections from Mainland investors. The dual listing of H-shares and A-shares in the ICBC IPO is a very good arrangement to address this concern, although the price differential between the H-shares and the A-shares remains and needs to be addressed. Some say the price differential reflects different supply and demand conditions. While this obviously is true, the partitioning of a market trading essentially the same financial instrument with the same shareholders' rights undermines the efficiency of the market. I understand that foreign exchange controls on the Mainland play a part in this process, but it still seems desirable for the healthy development of the market to remove artificial market partitioning. This can be done by special arrangements that would not undermine the foreign exchange controls. The two classes of shares can be made directly fungible, or indirectly fungible by trading depository certificates evidencing the holding of shares in the other market. An arbitrage arrangement, perhaps with special approval by the authorities for conducting the associated foreign exchange transactions, can be established to facilitate price equalisation. This may require the involvement of the State Administration of Foreign Exchange (SAFE) and could be conducted by a specially established public organisation on a non-profit basis, conducting arbitrage whenever a significant exchange-rate-adjusted price differential appears. It could also be opened up on a freely competitive basis, under close monitoring by SAFE as far as foreign exchange transactions are concerned.
Some have pointed out to me the possibility of a migration of secondary market activity away from Hong Kong when H-shares and A-shares are made fungible. They have also argued that an arbitrage mechanism to facilitate price equalisation would not be in the interest of Hong Kong. But I suspect that if an effective mechanism for arbitrage appears, market expectation would then be strong enough to help bring about price equalisation, lessening the need for actual arbitrage activities.
Joseph Yam
2 November 2006
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