In the News: Alibaba Raises $13 Billion; MSCI Issues Reform Demands; and Trump Signs Hong Kong Act

Alibaba's Hong Kong listing the world's largest in 2019

Alibaba had a successful secondary listing in Hong Kong with its shares closing up 6.6% in the world's biggest stock offering so far this year. The Chinese e-commerce giant's shares closed at HK$187.60 ($24) on its Hong Kong debut on Nov. 26, a 6.6% gain on the issuance price, raising almost $13 billion for the group with a market valuation of around $500 billion. It joins four other companies with a trillion-Hong-Kong-dollar capitalisation in the Hong Kong bourse: Tencent Holdings, HSBC, China Mobile and China Construction Bank.

The listing, sponsored by China International Capital Corporation and Credit Suisse, is a significant boost for Hong Kong, which has been reeling from months of protests. Alibaba shunned the city back in 2014 when it held its IPO in New York instead. Its long-awaited debut in Hong Kong was the largest stock sale in Hong Kong since 2010 and pushed the local exchange to the top of the global IPO league table in 2019. The listing's retail portion was oversubscribed by around 40 times, brokers said, which led to the retail investors' allotment being increased from an initial 2.5% to 10% of the share capital. Alibaba plans to use the new funds to bolster its artificial intelligence and other innovative technological capabilities.

At the listing ceremony, Alibaba's CEO Daniel Zhang thanked the Hong Kong Stock Exchange for "the continuous innovation and changes to the Hong Kong capital market" that has led to the stock sale. The exchange had the biggest listing reforms in 30 years when it amended its rules in April 2018 to allow companies with unconventional voting rights structures to list. Zhang has also said that Alibaba is "committed to position Hong Kong as a very important hub for [Alibaba's] global strategies." Although one-third of shares allocated to international investors was purchased by first-time mainland Chinese buyers, all eyes now are on when Alibaba's shares will be included in the Hong Kong-mainland Stock Connect schemes as it will allow even more mainland investors to buy the shares. The group has already been fast-tracked into the Hang Seng Composite Index, a broad version of Hong Kong's benchmark stock index, effective Dec. 9. However, it will not be eligible for entry into the main Hang Seng Index until May 2020 at the earliest, the index compiler has said, again due to Alibaba's unequal voting rights structure.  

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MSCI demands Chinese regulators address stock market problems

MSCI wants to see China address settlement cycle and hedging issues in its stock markets before it includes more Chinese stocks in its benchmark indexes. The global index provider made its demands known on Nov. 26, the day it completed its three-step process of increasing the weighting of A-shares in its flagship emerging markets index in 2019. The weighting now sits at 4% in the influential index, which is tracked by global investors managing around $1.9 trillion.

In a statement, MSCI clearly outlined the conditions for inclusion of more stocks, specifically raising issues surrounding inadequate access to hedging tools, issues with China's settlement cycle, a problematic holiday schedule, and the lack of tools allowing brokers to place a single order for multiple clients. It said that it would not hold further consultations on further weighting increases until these issues are addressed by the Chinese authorities.

Hedging tools, such as index futures and options contracts, are crucial for foreign investors and funds who want protection from market volatility. However, China does not have a mature derivatives market as it is seen by the authorities as a potential tool for foreign investors to short Chinese stocks to the detriment of local retail investors. China's settlement rules are another sticking point as they provide for shorter settlement cycles than many other large markets. This is complicated by the nation's tricky holiday schedule, different from Hong Kong's, which means that international investors cannot use Stock Connect on days when the markets of either side are closed. At the recent China's Capital Markets conference held in Hong Kong, an informal poll of participants from fund managers to private investors found that most of them deem settlement complexities and an inefficient securities lending ecosystem as the biggest inhibitors to further index inclusion and additional investor participation in China A-shares. In the U.S., there has been increasing backlash against index inclusion of Chinese stocks over trade war and human rights concerns. Two senators introduced legislation in November to stop the retirement savings of government employees from being directed to Chinese companies.

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Trump signs into law Hong Kong democracy act

U.S. President Donald Trump signed legislation expressing U.S. support for Hong Kong protesters with implications for Hong Kong's special trade status on Nov. 27. The bill, titled the Hong Kong Human Rights and Democracy Act, requires the State Department conduct annual reviews of Hong Kong's special trade status as well as sanctions against Chinese officials. The bill threatens to derail negotiations between the two nations in the ongoing trade war, with China threatening retaliation just as the two governments have made positive signals about a phase one trade deal being signed soon.

The U.S. granted Hong Kong special trade status in the 1992 Hong Kong Policy Act as the city has a separate legal and economic system from the mainland. It means that U.S. sanctions or tariffs placed on the mainland do not apply to Hong Kong. Revoking this status would mean treating Hong Kong the same as the mainland in trade affairs. However, as the U.S. has enjoyed its largest trade surplus among its global trading partners in the last decade with Hong Kong ($33.8 billion in 2018), it will be reluctant to rescind its special treatment of Hong Kong in trade affairs anytime soon. The American Chamber of Commerce in Hong Kong has warned that the legislation might have the perverse effect of harming Hong Kong's reputation as an international financial center by worsening public perception of the city's autonomy. This would make Hong Kong less attractive and more difficult to operate in for American companies, the Chamber has said.

Despite promising Chinese president Xi Jinping in June that he would not express support for the Hong Kong protests publicly while trade talks are ongoing, President Trump's hand has very much been forced by Congress and large domestic public support to sign the Hong Kong act. Although China has said it remains committed to working towards a phase one trade deal, the newly enacted law can only hurt the chances of a breakthrough in the trade war between the world's two largest economies. Under the legislation, the U.S. will review annually whether Hong Kong remains sufficiently autonomous to justify its special trade status. This autonomy is what makes Hong Kong not just any other Chinese city and is crucial to its status as an international business and financial hub. The city is seen as a "gateway to China" by many multinational firms with regional operations based there, attracted by the city's developed regulatory landscape and rule of law. Chinese firms and investors meanwhile use the city as a gateway to the rest of the world, for example for moving money overseas as well as for fundraising due to the city's deep pool of capital.

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