Hong Kong’s financial industry, in particular the IPO sector, is one of the industries that have been spared the impact of the Covid-19 pandemic over the past two years. Last year, the Nasdaq stock market was the world’s biggest IPO market, raising US$55 billion in total, and Hong Kong was the second with US$50 billion. The trend continued in Hong Kong in the first five months of 2021, with a total of 27 IPOs (including second-time listings). Nearly HK$180 billion in total has been raised, once again putting the Hong Kong stock market in second place after Nasdaq. The company that has raised the most funds here so far this year is Kuaishou Tech (1024.HK). By far the world’s biggest in 2021, that IPO saw the Chinese company amass nearly $50 billion. The second biggest IPO is that of South Korean e-commerce giant Coupang.

Nearly one year since the National Security Law took effect in Hong Kong, IPOs in the city’s stock market has often been cited by local financial officials as proof that Hong Kong’s status as an international financial hub remains unchanged, and that foreign capital is not retreating. To be sure, nothing has changed if we only look at IPO-related figures. Hong Kong’s ability to attract capital is indeed still strong. However, we should note that at a time when the US is taking control over the world’s leading high-tech companies, the top 10 IPOs in Hong Kong are those of Chinese concept stocks. And in terms of the investment banks helping the Chinese companies with the IPOs, foreign banks are not able to get involved much even if they completely follow China’s rules because China will not allow the fertile water of its land to flow to foreign soil. This trend will only get more pronounced in the future.

Whenever a big company has an IPO, investment banks around the world will scramble to be sponsors and underwriters. This is not only because there is big money in playing these roles but also because investment banks hope they can get involved in ensuing placings, bond issuances or spin-offs. For years, European and US investment banks have been the leading underwriters in IPOs around the world. In 2010, Hong Kong’s IPO market raised a record high of HK$445 billion. According to Bloomberg, in terms of underwriting and account management for IPOs that year, Morgan Stanley accounted for 11 percent of the total share, and the top eight investment banks involved in the IPOs that year were European and US banks (see the chart). The only Chinese bank that ranked relatively high was Industrial and Commercial Bank of China, which came ninth and accounted for less than five percent of the market share. The top 15 banks involved in the IPOs that year made up 88 percent of the total. Among them, 11 were foreign banks, which constituted

75 percent of the total, and four were Chinese banks, which constituted 13 percent. On the whole, the ratio of Chinese to foreign investment banks was 2:8.

In recent years, Chinese capital has been accounting for an increasingly bigger share in the Hong Kong stock market. In the first five months of 2021, the ratio of Chinese to foreign investment banks was about 6:4. Among the top 20 investment banks involved in underwriting, 11 were Chinese banks, accounting for 58 percent of the total, while the remaining nine foreign banks accounted for 33 percent. The market share of big investment firms such as Goldman Sachs, UBS and JPMorgan Chase, which are long-time players in the local IPO market, has shrunk by more than half compared with a decade ago. Even Deutsche Bank and Barclays, which used to play a key role in IPOs, have not even managed to play the role of IPO co-organizer in Hong Kong in recent years.

When it comes to IPO, quality trumps quantity. One deal involving an industry giant is better than 10 IPOs of small companies. In the first five months this year, 27 IPOs raised nearly $180 billion in Hong Kong. Among them, the top 10 amassed $158.7 billion, accounting for 88 percent of the total, while the top five represent 72 percent with $130 billion. A total of 103 investment banks were involved in the top 10 IPOs, among which 33 were foreign banks and 70 Chinese banks.

A decade ago, the ratio of foreign to Chinese investment banks was 8:2. Today, it is 3:7. With Chinese concept stocks continuing to dominate Hong Kong’s IPO market, foreign investment banks in Hong Kong will play a less significant role, perhaps responsible for distributing products only.

Under the current political system, the IPO market, which Hong Kong takes pride in, will adhere to the principle of “patriots ruling Hong Kong”. Patriotic banks will be the sponsors while foreign forces have to step aside. This is what defines Hong Kong as an international financial center in the future, and this applies not only to IPOs but also other financial services.

(Stock Wing, fb.com/stockwing1)

This article is translated from Chinese by Apple Daily.

Click here for Chinese version

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