In September 2014, Alibaba—China’s e-commerce technology behemoth—debuted on the New York Stock Exchange at a market capitalization of $25 billion, becoming the largest U.S. IPO ever.
Less than a decade later, Alibaba’s calculus has changed. On Monday, the company announced it will pursue a primary listing on the Hong Kong Stock Exchange (HKEX) as the 2024 deadline for US-listed Chinese firms to comply with US auditing rules inches closer. Washington and Beijing are negotiating rules that would allow US officials to inspect the books and auditors of Chinese companies listed in the US, but the two sides have been unable to reach an agreement.
Discussions have reached an impasse because Beijing wants to redact sensitive information in Chinese firms’ audit documents over national security concerns, but the US is demanding full access, according to Bloomberg. Should the US and China fail to strike a deal, 261 US-listed Chinese firms worth $1.3 trillion could be booted from US exchanges.
The primary – rather than secondary – listing in Hong Kong of one of China’s most recognized technology firms will strengthen the Asian bourse’s role as Wall Street’s replacement for Chinese securities listed in US Alibaba’s move, also providing a blueprint for its peers – and providing a viable back. -up plan that provides direct access to a new pool of mainland China investors in the event of a US delisting and global investor retreat. And, experts say, it could be the catalyst that triggers a wave of Chinese tech giants flocking to the city for an initial public offering, which could result in billions of inflows to one of Asia’s top exchanges.
Hong Kong hedge
For Chinese firms, Hong Kong’s sophisticated capital market and proximity to mainland China make it the most attractive Wall Street option in the event of a massive delisting of Chinese stocks in the US. The loss of China-based companies from New York would make it more difficult for Americans to invest in Chinese companies. US institutional investors alone have $200 billion in exposure to Chinese American depositary receipts (ADRs), a specific security that allows US investors to buy shares in foreign firms.
In recent years, Chinese companies have pursued secondary listings – also known as “repatriation listings” – in Hong Kong to hedge against US delisting risks. Secondary listings are easier, faster and cheaper to complete than primary listings.
Alibaba will convert its secondary listing into a dual primary listing in New York and Hong Kong. With the 2024 delisting deadline approaching, and Washington and Beijing apparently no closer to reaching an agreement, this strategy made the most sense for Alibaba given the high risk of a US delisting, Liqian Ren, director of ModernAlpha at Wisdom Tree Asset Management, told Fortune.
China wants a compromise that would see US-listed Chinese firms fall into three categories: those holding non-sensitive, sensitive and secret data, according to a FT report. Beijing is likely to allow those in the first category to open their books to US regulators. But companies that hold what Beijing considers sensitive and secret data will be required to remove the list from the US, as it seeks to prevent foreign governments from accessing such information.
China recently passed new data security and personal data protection laws, giving the government more control over private companies’ data in the name of national security. Alibaba, an e-commerce and cloud provider with over 1 billion users, would most likely be classified as a company that has information that Beijing wants to keep within its borders. “All the features of Alibaba point to the fact that the time in the US may soon be over,” says Ren.
Alibaba’s pivot “will prove to be a catalyst” for peers to follow suit, said Adam Montanaro, investment director for global emerging markets equities at abrdn. Fortune. Hong Kong should “expect a flurry” of US-listed Chinese firms seeking an initial public offering in Hong Kong, Travis Lundy, an analyst at Quiddity Advisors, an investment advisory firm, wrote in a Monday note.
Chinese giants such as Alibaba rival JD.com, Internet and artificial intelligence (AI) giant Baidu, and gaming company NetEase are highly likely to go this route, Brian Freitas, an analyst at Periscope Analytics, said in a Monday report. The larger U.S.-listed Chinese stocks, about 80 to 100 of them, will be eligible for a primary listing, Lundy estimates. Such firms “fit the bill” to be removed from the US as major internet platforms with millions of users and reams of data, Ren notes.
SoftBank-backed e-commerce firm Dingdong has started preparing for a dual primary listing in Hong Kong, according to a recent Reuters report. In May, video platform Bilibili said it had applied for an HKEX dual primary listing and aims to complete the deal in October. “The writing is on the wall for these companies,” says Ren.
Tapping of the mainland pipeline
And a primary listing on the HKEX provided an important advantage for Chinese companies: direct access to mainland investors.
Mainly listed stocks in Hong Kong are eligible for inclusion in Stock Connect, a system linking the Hong Kong, Shanghai and Shenzhen stock exchanges. Individual and institutional investors from the mainland can therefore invest directly in these companies.
Wealth management firm Bernstein predicts that Alibaba’s inclusion in Stock Connect could translate into $21 billion in investor inflows into its Hong Kong-listed shares. The company’s three-month average daily trading volume in Hong Kong is likely to rise from today’s $700 million to closer to the New York volume of $2.6 billion, said Brendan Ahern, chief investment officer at Krane Funds Advisors, a China-focused investment management firm. Fortune. He points to Alibaba rival Tencent as a case study. Chinese investors, via Stock Connect, currently hold 7% of Tencent stock, worth $29 billion. Alibaba will see a “significant inflow … assuming a similar amount” of Chinese investor funds are channeled into Alibaba’s Hong Kong share class, he says.
Chinese investors will flock to these stocks, experts say. A recent rally in China’s tech stocks will attract mainland investors “who think the worst” has passed, said John Lau, head of Asian Equities at financial firm SEI Investments. Fortune. Mainland investors are also looking for ways to diversify their portfolios, given China’s real estate crisis and the government’s crackdown on cryptocurrencies, Ren says.
Goldman Sachs predicts that investors could give Hong Kong $30 billion in inflows if Alibaba and 14 other Chinese firms convert their secondary listings to primary listings in Hong Kong.
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