The Taiwan Banker

The collateral damage from China’s crackdown on the private sector is spreading to Hong Kong, where the IPO market has cooled after a red-hot run in the first half of the year. Firms raised a record US$27.6 billion on the Hong Kong Stock Exchange (HKEX) from January to July. Yet from August to October, deals amounted to just over US$10 billion, and there are no major listings expected before 2022. The total of US$37.8 billion raised in Hong Kong thus far in 2021 is still No. 4 globally, but behind the Nasdaq, New York Stock Exchange (NYSE) and Shanghai’s various exchanges, according to Bloomberg. Hong Kong’s slowing deal pipeline signifies deep concern among companies and investors alike about the implication of Beijing’s ever-escalating crackdown on private business. What began as a bid to curb the power of Big Tech has morphed into a massive campaign to reassert the ruling Communist Party party’s preeminence in China’s economy. Hong Kong’s IPO market performed well in the first half of the year because the crackdown initially targeted only fintech firms. Investor appetite for other tech companies remained strong. Under that scenario, Chinese internet giant JD.com put the planned listing of its fintech unit JD Digits on ice, but went ahead with the IPO of its logistics unit, which raised US$3.2 billion. Overall, four of the top 10 Hong Kong primary listings in the first half of the year were tech firms. Besides JD Logistics, they included video-sharing mobile app Kuaishou Technology, travel-booking site Trip.com and the supply chain fintech Linklogis. With its focus on trade finance, Linklogis is not in regulatory crosshairs in the same manner as firms that focus on consumer lending like Ant Group. Kuaishou may now wish it had delayed its IPO. As a digital video provider, the company is vulnerable to allegations of hosting improper content, an inevitability in China’s current political environment. China’s cyberspace regulator criticized Kuaishou and fined the company in July for having sexually suggestive videos of minors and other inappropriate content on its platform. In late October, Kuaishou chief executive and co-founder Su Hua stepped back from day-to-day business. While Kuaishou may indeed recover in the long term, the widening crackdown on digital content augurs ill for its short-term prospects. As of early November, Kuaishou’s market capitalization was about US$50 billion, down from more than $220 billion in mid-February following its Hong Kong IPO. Online entertainment firm Bilibili – which had a secondary listing in Hong Kong earlier this year – may be next, although the company struck a business-as-usual tone when it unveiled a record 16 new games at its summer launch event in August. That move struck some observers as rather gung-ho given that Chinese state media lambasted video games as “spiritual opium” earlier in the month. Although the reference to opium was later removed from the article, Beijing has not softened its tone on video games, which it sees as dangerously addictive. In September, China mandated that under-18s could only play games for three hours a week at specific times on Friday, Saturday and Sunday. By the third quarter of the year, Hong Kong’s IPO market had cooled considerably. HKEX posted a net profit of HK$3.25 billion (US$417.9 million) for the July to September period, down slightly from HK$3.34 billion a year earlier. Investment income plunged by 76% to HK$155 million from HK$645 million in 2020. “The IPO market in the third quarter reflects the cautious sentiment amid the regulatory development in mainland China. However, the pipeline of IPOs in Hong Kong remains solid,” HKEX chief executive Nicolas Aguzin said during a post-earnings conference. Navigating uncertainty To be sure, Hong Kong retains some core strengths that will continue to make it attractive to Chinese companies in the long run. Except for New York, no other destination can offer Chinese firms such liquid capital markets. And Hong Kong does not come with the same political risks as New York. Chinese firms who choose to go public in the U.S. now must worry not only about being delisted by American authorities for failing to comply with audit rules: They also must consider the signal a New York IPO sends to Beijing in the current political climate. Nobody wants to become the next Didi Chuxing. For better or worse – and it really depends how we look at it – Hong Kong’s IPO market is completely dependent on China for its well-being. Unlike the Nasdaq or NYSE, the HKEX is not a truly international bourse. Rather, it is China’s offshore stock exchange. It booms when Chinese firms want to raise capital offshore, and fizzles when they do not. If left to market devices, the HKEX would likely thrive. After all, the Chinese economy is the world’s second largest. Many Chinese companies want to go public offshore but close to home.The trouble is that the Chinese Communist Party is tightening its grip over Hong Kong at a frightening pace. The political intrigues that vex business on the mainland are thus now the HKEX’s problem too. Which industry will be the next to fall out of favor? Xi Jinping is unlikely to stop at online gaming and education. Maybe it will be biotech or more generally healthcare, the latest red-hot and supposedly politically safe sector for investment. Of the 200 IPO applications in Hong Kong at end of September, 50 were healthcare firms. Chinese companies looking to go public offshore now face heightened scrutiny over their data security practices after Beijing launched a cybersecurity probe into ride hailing giant Didi Global Inc. just days after its US$4.4 billion U.S. IPO. In August, Bloomberg reported that the HKEX was asking Tencent-backed healthcare startup We Doctor for assurances that its data handling practices comply with China’s rules ahead of an IPO that could raise up to US$3 billion. With no updates on that deal since, it appears that We Doctor has decided to hold off for now, likely a wise move. Until regulatory uncertainty eases, Hong Kong’s IPO market will likely be quiet compared to the record first half of the year. However, one type of deal has relatively low political risk and will probably become more common: a switch from New York to Hong Kong. Keep in mind that Chinese firms raised a record US$12.6 billion in the U.S. in the first half of the year before the Didi debacle crashed the party. Some companies need to provide investors with a timely exit. For those firms, switching to Hong Kong may make sense. It is a growing list. Audio startup Ximalaya filed in Hong Kong after scrapping its U.S. IPO plan. Also mulling that move are logistics firm Lalamove, lifestyle content platform Xiaohongshu, artificial intelligence chip startup Horizon Robotics, and the owners of the apps Soul (social networking), Keep (fitness) and Kujiale (3D software for interior design), according to Bloomberg.