IPOs and Financial Intermediation

inSight

13 Jan 2005

IPOs and Financial Intermediation

2004 was an impressive year for IPOs in Hong Kong. The possibilities for further developing this channel of financial intermediation are worth pondering.

Once in a while participants in the stock market should remind themselves that this is the primary market for initial public offerings (IPOs), which serves the important role of bringing together investors and institutions with a need to raise funds. It is through IPOs that the important process of financial intermediation, which promotes economic growth and development, takes place. This is what justifies the existence of a stock market and the whole range of associated activities that it generates, including the many jobs connected with it. The secondary market provides liquidity after listing so that investors are attracted to the IPOs. The assurance that existing stock holdings can be sold at any time, having regard to the preferences of individual stockholders, provides the necessary comfort. The secondary market cannot exist on its own without the primary market, although as a machine for making (and losing) money and a centre of constant investor attention the former is a lot more important than the latter.

It is therefore necessary for all concerned to exercise as much care and diligence as possible in the organisation of IPOs, particularly in a market the size of Hong Kong, which, according to the latest estimates, was the third largest centre for raising money through equity funds in 20041. Despite the unfortunate events surrounding the Link REIT IPO, Hong Kong was one of the largest centres in the world for the amount of IPOs organised last year. This is quite an achievement. There is also a good chance that Hong Kong will maintain that status in the years to come, and even aspire to move higher in this ranking, if we play our cards right.

We all know that Mainland China relies too heavily on the banking system for intermediating funds and has an urgent need for diversification of financial intermediation channels, for financial stability and efficiency, and economic development reasons. Although considerable progress has been made by the Mainland authorities, the development of the debt and equity channels on the Mainland has, for one reason or another, been slow. Hong Kong has ready-made debt and equity trading platforms of international standards that command the confidence of international investors. The question is how this world-class platform can be used to serve the financial intermediation needs of the Mainland.

This, of course, is not an easy question to answer, principally because of continuing exchange controls on the Mainland, which not only restrict currency convertibility for investment purposes but also cross-border capital flows, even if they are denominated in renminbi. While Mainland enterprises are given permission, on a case-by-case basis, to raise funds offshore, for example in Hong Kong, there is no mechanism yet to allow the many individual or institutional Mainland investors to invest outside of the Mainland. And so the listing of Mainland enterprises on the Hong Kong stock market only attracts, and leads to the inflow of, foreign (including Hong Kong) funds. If somehow a way could be found to build on this strength and to cater for the demands of investors on the Mainland without significant adverse effects on exchange control, Hong Kong's role as an international financial centre could be reinforced.

We must therefore think hard and explore the options for achieving this. This is not just a matter of maintaining Hong Kong's status as an international financial centre, as required in the Basic Law. It is, more important, a matter of meeting a pressing urgent need on the Mainland. I am sure we have the financial architects and engineers in Hong Kong who can think of imaginative initiatives to serve the specific needs of our country. And let us put Link REIT behind us, as one IPO that have to be pulled because of unforeseen circumstances, among the many successful ones. All concerned will have to learn from it, but it will not have any lasting effects on Hong Kong's status as an international financial centre. There are much more exciting things ahead of us, if we play our cards right.

 

Joseph Yam

13 January 2005

 

1 Figures up to November 2004 provided by World Federation of Exchanges.

 

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