Date
21 October 2017
Hong Kong and mainland stock markets are closely related but they also compete against each other for capital and quality candidates for listing. Photo: Reuters
Hong Kong and mainland stock markets are closely related but they also compete against each other for capital and quality candidates for listing. Photo: Reuters

Why MSCI inclusion of A shares may threaten Hong Kong

China’s A shares was included in the MSCI emerging market index last week, shortly after the Hong Kong stock exchange unveiled a plan for a new board. Is that a coincidence?

In my opinion, Hong Kong and mainland markets are closely related but they also compete against each other.

Inclusion in the MSCI index is an opportunity for China to draw quality investors into A shares, which in turn will enhance corporate governance and attract more good companies to list.

If MSCI raises the weighting of A shares in the future and reduces the weighting of H shares, it would affect the position of the Hong Kong market in the long run.

The new board market initiative can be seen as an effort to boost the quality of listed firms in Hong Kong in order to boost competitiveness.

For the new board market (including the New Board Pro and New Board Premium) to be successful, we need to attract some heavyweight companies at the very beginning.

Good quality counters, international investor mix and a highly liquid market are three fundamental factors that can forge a virtuous cycle.

It’s reported that many Chinese start-ups listed on the mainland’s third board are keen to get listed in Hong Kong under the new scheme.

But in my opinion, only a few will really come.

First of all, most of those companies listed on the mainland’s third board have little international business; there is no obvious advantage to list in Hong Kong.

Given the difference in the legal system and language, the cost of listing in Hong Kong could be prohibitive. Not to mention companies interested will have to hire internationally recognized accounting firms, legal firms and underwriters to handle the listing procedure.

This article appeared in the Hong Kong Economic Journal on June 26

Translation by Julie Zhu

[Chinese version 中文版]

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RT/RA

Senior investment banker

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