For Chinese Companies, Hong Kong Is Hard to Replace

Political unrest has cast doubt on Hong Kong’s prospects, yet for Chinese companies the city plays a role that neither Shanghai nor global financial centers such as New York can easily displace. There are legitimate fears: The protests that have roiled Hong Kong for three months could make China more supportive of its homegrown exchanges in Shanghai and Shenzhen. China has been gradually opening up its stock markets in the past few years. Just this week it scrapped the quotas on two investment programs for foreign institutional investors. Shenzhen and Shanghai now boast a combined market capitalization of $7.5 trillion, nearly twice Hong Kong’s.

Chinese companies make up about 70% of the Hong Kong market, so losing their business to the mainland would be an existential threat. The almost $37 billion unsolicited bid made Wednesday by the city’s stock-exchange operator,

Hong Kong Exchanges & Clearing

388 1.43%

for its peer in London may have betrayed some unease. Still, Hong Kong’s separate monetary and legal systems—as long as they are maintained—should secure its unique role as China’s financial firewall. The city’s unfettered capital flows and rule of law have allowed Chinese companies to tap foreign investors and pursue acquisitions abroad, while leaving China’s own financial system relatively insulated. And while China’s markets have been opening up, the pace of inflows has remained slow. Foreign investors only own about 3% of the stocks, which tend to be highly volatile, and more than half of that came through a trading link with Hong Kong itself. The so-called “Stock Connect” has brought a cumulative 794 billion yuan ($112 billion) into mainland markets since its 2014 launch.

China has tried many times to create its own version of Nasdaq that might attract domestic, or even foreign, technology companies, but so far it hasn’t been successful. Its latest attempt, Shanghai’s STAR market, has just blown more bubbles. New York in particular does compete with Hong Kong for initial public offerings. For Chinese companies wanting to tap foreign capital, though, Hong Kong remains the undisputed first choice. Over the past five years, nearly three-quarters of Chinese IPOs that haven’t taken place on the Chinese mainland have been in Hong Kong, according to Dealogic.

Flags flap outside the Hong Kong stock exchange. The city’s stock market meets the needs of China’s corporate sector better than any rival.


anthony wallace/Agence France-Presse/Getty Images

Last year, mainland companies raised $35 billion through Hong Kong IPOs—more than the $21 billion they raised in mainland China. Property developers and financial institutions are particularly big users of Hong Kong’s capital markets: Between 2012 and 2018, about half of their equity financings, including secondary offerings and rights issues as well as IPOs, took place in Hong Kong, according to brokerage


While other global financial centers could probably serve Chinese companies’ offshore needs—Singapore has the most similar business model—Hong Kong already has a cluster of Chinese investors and financial institutions that understand the country far better. Rising tensions between China and the U.S. may also give Chinese companies second thoughts about tapping American capital markets. As long as Hong Kong stays open while mainland China remains relatively closed, the city will be China’s only truly global financial center.

Write to Jacky Wong at

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