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However, PWC believes Hong Kong will maintain its competitiveness as a fund-raising platform for global capital in the next five years. It argues that the equity capital markets in Hong Kong and China are different and that there is little competition between them.
"Different companies have different aims when they go public," says Edmond Chan, a partner in PWC’s capital market services group. "Some companies want to polish their brands and images, to get access to international capital and to enjoy higher flexibility of money flow. They will choose to list in Hong Kong. Companies that list in the A-share market, which is (largely) restricted to domestic investors and is being operated under an exchange control regime, are primarily focused on raising renminbi funds to finance their expansion in China."
According to reports issued by the accounting firm, ample liquidity and the return of Hong Kong-listed H-share companies to the A-share market resulted in a tripling of the total IPO funds raised on the Shanghai and Shenzhen exchanges last year to Rmb477.1 billion ($65.7 billion). The Rmb438 billion raised on the Shanghai Stock Exchange saw the Chinese bourse top the world in terms of IPO funds raised in 2007, surpassing both the London Stock Exchange and the New York Stock Exchange. Companies going public on the Hong Kong stock exchange raised a combined HK$295 billion ($37.8 billion).
Part of the reason for the sharp increase of IPOs in China is that Beijing has been directing large profitable Chinese companies to list in Shanghai or Shenzhen as a way of raising the profile of the local equity markets. While the regulators have issued no formal guidelines in this respect, it is no secret that several companies that originally sought to go public in Hong Kong changed their plans and went for a domestic listing instead.
Indeed, Vincent Chan, who is head of China research at Credit Suisse, argues that there is now real competition between Hong Kong and China, compared with the situation before 2006 when Hong Kong was the dominant market for Chinese companies wishing to raise equity capital.
"Companies can raise funds either domestically in Shanghai or overseas in Hong Kong and the domestic (China) market will be playing a bigger and bigger role," says Chan. "Right now the A-share market is commanding extremely rich valuations, which I don’t think is sustainable, and in the near term, when the market starts to correct, there might be a cooling-down period of A-share listings. But in the longer term, domestic listings will be a trend, and to a certain extent, the Hong Kong market is threatened by that trend."
That said, he notes that Hong Kong maintains its edge as an international fund-raising hub for now.
"Currently the A-share market is mainly attracting domestic funds and H-shares are mainly attracting overseas funds. Gradually the line will be increasingly blurred, but it will take some time," he says.
One reason for this is that the main way for international investors to buy A-shares today is through the qualified financial institutional investor (QFII) scheme and that is still relatively small in scale. Also, until the renminbi is fully convertible, companies will continue to raise funds in both markets, he adds.
PWC notes that Hong Kong achieved the highest ever number of new listings in 2002 with 117 companies going public, including 57 on the Growth Enterprise Market (GEM). Despite a significant drop in the number of new listings on the GEM board, the number of new listings remains at 70 or over each year. In 2007, Hong Kong saw 86 new listings even though there were 125 new listings in Shanghai and Shenzhen combined.
