China increases access to its hottest start-ups

Draft regulations bring stocks with different classes of voting rights into the trading links
Chief Investment Office05 Aug 2019
Photo credit: AFP Photo


Chinese authorities proposed rule changes that would for the first time allow local investors to buy shares of some popular technology companies listed in Hong Kong – including, potentially, Alibaba Group Holding Ltd.

The country’s stock exchanges on Friday (2 August) published draft regulations that would bring stocks with different classes of voting rights into the trading links between the mainland and the former British colony, giving onshore traders access to some of China’s hottest start-ups.

Xiaomi Corporation and Meituan Dianping went public in Hong Kong last year, the first major tech firms to use new rules permitting weighted-voting rights, also known as dual-class shares, on the city’s bourse. Alibaba, which uses the structure and is listed in New York, is said to be readying a Hong Kong listing under the new regulations, which could raise as much as USD20b.

China’s authorities have been trying to find ways to keep the country’s tech companies at home, and last year worked on plans for depositary receipts, which were designed to let dual-class shares, not permitted on its major exchanges, trade onshore. A new trading venue, the Star market, allows the structure, though only smaller companies have so far gone public.

Hong Kong Exchanges & Clearing Ltd’s (HKEX) years-long push for weighted-voting rights, which are often used by tech founders to keep control of their companies even after going public, was in part premised on China-based technology firms choosing Hong Kong over the US because Chinese onshore investors would easily be able to invest via the stock connect. But mainland authorities said in July 2018 that dual-class shares would not be allowed in the system, a decision that caused Xiaomi’s shares to slump.

In December, the Shanghai, Shenzhen, and Hong Kong exchanges said they had agreed on a “detailed arrangement” for including shares with unequal voting rights into the connect, without providing more details. The new rules were expected to begin in mid-2019, the bourses said at the time.

A change would likely boost HKEX, which stands to benefit from increased trading volume. The bourse operator currently generates about 5% of its revenue from the links with stock exchanges in Shanghai and Shenzhen. – Bloomberg News.

The Shanghai Composite Index declined 1.41% to 2,867.84 on Friday and the Hang Seng Index fell 2.35% to 26,918.58.



As if falling profits and escalating trade spats at home and abroad were not bad enough, Samsung Electronics Co Ltd’s shares may be dealt another blow when MSCI Inc reviews weightings of its stock gauges this week (ending 9 August).

The index provider’s quarterly review scheduled for 7 August could trigger a net outflow of KRW458b (USD382m) from the shares of South Korea’s top company this month as the nation’s weighting is set to get cut in the MSCI Emerging Markets Index, according to estimates.

The ongoing inclusion of China A-shares and Saudi Arabia in Emerging Markets stocks will lower the representation of other countries. The move could mean South Korea’s weighting will fall by 0.3 percentage point to 12%, according to reports.

The lower weighting in MSCI indices, coupled with trade wars and the not-so-cheap valuation, may attract more bears on Samsung’s stock, which has already seen short interest rising since the end of April.

US President Donald Trump abruptly escalated his trade war with China late last week (ended 2 August), announcing that he would impose a 10% tariff on a further USD300b in Chinese imports while Japan confirmed Friday that it will remove South Korea from a list of trusted export destinations.

Samsung shares have fallen 3.4% since the company reported sharply lower profits on Wednesday amid global trade tensions and a wireless industry slump. However, the stock is still up 16% for the year, compared to a 2.1% decline in the benchmark Kospi Index. – Bloomberg News.

South Korea’s Kospi Index fell 0.93% to 1,979.54 early-Monday (5 August) morning. It lost 0.95% to 1,998.13 on Friday.

Shares in Sydney slipped on Monday morning with the S&P/ASX 200 Index losing 0.29% to 6,748.80 at the open. The index declined 0.30% to 6,768.57 in the previous session.

The Taiwan Stock Exchange Weighted Index weakened 1.70% to 10,549.04 on Friday.


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