We reckon there are a few separate issues that are causing Hong Kong’s capital markets to be in the doldrums. First, given the degree to which the city is economically dependent on the mainland, it is hard for Hong Kong to thrive unless the mainland is also thriving. However, a long-running real estate slump, uncertainty about the government’s support for the private sector, geopolitical tensions and a corresponding fall in foreign direct investment have adversely affected both the Chinese economy and investor sentiment. Second, U.S. interest rate hikes have not been beneficial for capital markets in general, and thus IPO candidates are taking a wait-and-see attitude in the hope of ultimately achieving a more successful market debut with a higher valuation and larger number of funds raised. Third, it is possible that global investor appetite for the type of companies that list in Hong Kong is ebbing at the same time that Chinese firms are choosing to list in Shanghai and Shenzhen rather than the former British crown colony.
The strategy of Hong Kong’s regulators for many years has been to court leading Chinese consumer tech companies to list in the city, but it may be time to shift gears. After all, China’s consumer internet economy, while still huge and important, no longer enjoys the same kind of growth trajectory or regulatory support as it did in the past. At the same time, the favored industries in the mainland now include semiconductors, aerospace, new-energy vehicles, artificial intelligence and others that fit into central government plans for leadership in certain critical technologies. Companies in these industries are likely to increasingly choose listing on the mainland, especially now that Beijing has enacted measures to streamline domestic listings, making it easier for companies to go public.
A way forward for Hong Kong is likely to look beyond wooing Chinese companies to list on the Hong Kong Stock Exchange and find ways to lure companies from other regions of the world with close links to the city. Hong Kong still has key advantages as an international financial center that could make it attractive to certain non-Chinese companies, and in this case, Hong Kong would not have to compete directly with mainland exchanges. Companies from Southeast Asian and/or Middle Eastern countries aligned with China’s Belt and Road Initiative could be good candidates for such listings.