China Capital Markets Research

Amid clouds of a U.S.-China financial war, Hong Kong is fast becoming the default for Chinese fintech IPOs. The former British colony offers liquid capital markets both close to both home and global investors. But there are exceptions. Lufax, one of China's largest online wealth management platforms, is reportedly instead eyeing a New York IPO that could raise up to US$3 billion. If Lufax moves fast, it can list in the U.S. before new rules go into effect that may prevent Chinese firms non-compliant with American accounting standards from listing on U.S. exchanges.

Shanghai's STAR board is introducing a more market-driven approach to China's initial public offerings. Listing on the STAR market is more streamlined than the traditional process in China, where new listings are subject to an informal price cap of 23 times earnings and a 44% ceiling for first-day gains. Before the Shanghai STAR Board was launched it July 2019, it could take many years before companies' plans to go public were approved. Now a flurry of tech listings on the Shanghai STAR market are shaking up China's capital markets.

For the IPO of China's fintech giant Ant Group, two listings are better than one. Instead of going public only on the Hong Kong Stock Exchange or the Shanghai STAR Market, Ant plans to list on both. Ant has not disclosed the size of its coming IPO, but the firm is reportedly valued at US$200 billion, up from US$150 billion during its 2018 fundraising. Ant reportedly plans to sell 10% of its shares through the twin listing, which could come this year or in 2021. An uncertain market outlook will inevitably weigh on timing.

As tensions between the U.S. and China flare up in the financial sector, the future of Chinese fundraising in America's capital markets looks uncertain. Hong Kong has benefited, attracting a growing number of Chinese tech IPOs and secondary share listings from juggernauts like Alibaba and JD.com. Another possible winner in the U.S.-China financial tussle could be London, which began operating the London-Shanghai Stock Connect scheme in 2019.

In early April, China's Starbucks rival Luckin Coffee was revealed to be a paper tiger. The company that was supposedly giving the U.S. coffee giant a run for its money in the world's largest consumer market had literally fabricated its success. To be sure, Luckin's 4,500 China stores - exceeding Starbucks' 4292 - were no mirage. But the company's sales figures were bogus. On April 2, Luckin publicized the results of an internal investigation showing RMB2.2 billion (US $311 million) in fraudulent sales from the second to the fourth quarter of 2019.

Chinese fintech giant Ant Financial is reportedly working with banks to restart a long-stalled initial public offering. In its most recent fundraising round, held in June 2018, Ant was valued at US$150 billion. With a price tag like that, when Ant does go public, the listing will be pathbreaking for Asian companies. The company has not given a timetable for the IPO, but Credit Suisse and China International Corp. are involved in initial preparations, according to The Financial Times.

Since its return to China in 1999, the former Portuguese colony of Macau has become the world's gambling capital, with a casino industry far larger than Las Vegas's. Macau's huge gaming sector has helped the territory maintain strong economic growth over the past two decades, even during the global financial crisis of 2008-09. However, reliance on gaming exposes Macau to an unusually high level of financial crime risk. Despite government efforts to tackle the problem, Macau remains at high risk for money laundering.

Given Macau's money laundering travails, it may come as a surprise that the territory has plans to launch a stock exchange. After all, strong regulatory compliance is a necessity for any city with ambitions to become a financial center. It goes hand in hand with the rule of law. Neither Hong Kong nor Singapore could have become financial centers without both of these attributes. Nevertheless, He Xiaojun, director of Guangdong Province's Financial Supervision and Management Authority, said in October that Macau had submitted a plan to set up an RMB-based stock exchange to the central government. There is hope that the stock exchange will become “the Nasdaq of the People’s Republic of China," he was quoted as saying by TDM Chinese Radio.

In a sign of increasing tensions between the U.S. and China in the financial sector, the Nasdaq is tightening scrutiny of small Chinese companies' IPOs. These firms usually raise most of their capital from Chinese investors rather than American ones. The shares of these companies tend to trade thinly once they've gone public, limiting their appeal to large institutional investors - on whose interests the Nasdaq focuses.

Recent reports in the U.S. media have described the Trump administration mulling a plan that would involve the delisting of Chinese firms from U.S. stock exchanges. The Trump administration has denied the reports, while political heavyweights such as Senate Majority Leader Mitch McConnell have dismissed the idea outright. McConnell told CNBC that the Treasury Department made clear it does not favor delisting Chinese firms from U.S. stock exchanges.

Can Shanghai’s new NASDAQ-style exchange really become a NASDAQ and can Shanghai become New York?

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