Shaking off the COVID-19 shadow after three isolated years, Hong Kong is now gripped by a fresh challenge as subdued markets sap the appetite for fundraising activities. With weak global demands and domestic headwinds putting a dent in China's much-hyped reopening, Hong Kong's capital markets have been struggling to take off.
Persistent Sino-US animosity has also prompted wary Chinese businesses to opt for a mainland listing, undercutting a lucrative portion of IPO activities once dominated by the Asian financial hub and suppressing legal advisory work.
"At a macro level, Hong Kong stocks have been battered by rising interest rates and tightening monetary policies against the backdrop of rising geopolitical tension and US-China rivalry. At a domestic level, earlier social unrests, and recent crackdown on tech companies in the PRC had significantly dampened market sentiment. However, the removal of social restrictions and border reopening have restored and improved business confidence," says Pan Tsang, a corporate partner at Robertsons.
"Such factors contributed to lower valuation and weakened market sentiment, and many companies, therefore, adopted a wait-and-see approach and deferred their listing plans," adds Tsang.
Eric Chow, managing partner at Eric Chow & Co. in Association with Commerce & Finance Law Offices, also attributes the relative dearth of Hong Kong flotations this year to the monetary tightening cycle and an anaemic global economic recovery.
"It is not surprising to see many investors choosing to mitigate the risks of their investment portfolio by refraining from active investment activities, hence leading to a decline in trading volume in the stock market, including the demand for new share sales in Hong Kong IPO market. We have seen quite a number of potential issuers taking a prudent approach in assessing their IPO plans, or even postponing their plan for listing," says Chow.
The Hong Kong Stock Exchange accounted for a mere three percent of global IPO proceeds in the first quarter of 2023, according to a PwC analysis, with jurisdictions like Japan, Indonesia, and the UAE well ahead of it.
Specifically, the HKEX registered a 20 percent rise in deal volume by hosting 18 IPOs in Q1 this year, up from 15 from the same period last year, according to Deloitte. But the deal value plunged by 51 percent from HK$13.6 billion ($1.73 billion) to HK$6.6 billion ($840 million).
All the listings were small offerings, and with no China concept stocks or IPOs of life science and healthcare companies, the Hong Kong bourse experienced its slowest start in five years.
The IPO of ZJLD Group further dampened the wavering investor confidence. The Beijing-based liquor company sealed Hong Kong's biggest listing by raising $676.4 million, only to see its stocks trading below water.
"The most important factor for companies is price," says Tsang. "Hence, given that the Hang Seng index is currently trading at below 20,000, the momentum in Hong Kong's capital markets will be closely tied to the performance of the wider stock market. If mainland China's economy and the macroeconomic climate improves, this will no doubt help boost stock prices and push forward IPO activities in Hong Kong."
However, there are signs that the listings market is gearing up for a brighter second half of the year. Analysts from Deloitte peg the number of Hong Kong's full-year new listings at 110, with HK$230 million ($29 million) expected to be raised.
Lawyers believe the Specialist Technology Companies listing rules and a slew of new trading platforms will burnish Hong Kong's allure to listing companies and investors.
"With the new specialist technology company regime, I anticipate a number of tech unicorns will seek to list in Hong Kong when the stock prices climb back up at a better valuation, whereas Hong Kong will continue to attract pre-revenue biotech companies," says Tsang.
Developments such as HKD-RMB Dual Counter Model and the recently launched Swap Connect, which gives Hong Kong and international investors access to onshore RMB interest rate swaps, will also "boost the city's status as an international financial centre and the world's premier offshore centre for RMB," Tsang adds.
And Chow feels a strong Chinese economic rebound cannot be ruled out just yet. He is anticipating a reinvigorated retail and consumer sector, which, coupled with expected stimulus packages to boost consumer demands, could lead to strong IPO appetite for "quality companies in the consumer sector."
"Despite a slow market, there is nonetheless an exciting anticipatory feeling across the PRC market, with great plans and projects ahead," says Chow.
