The Hong Kong Stock Exchange will celebrate its 24th anniversary on 21 June 2024.
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High U.S. interest rates, regulatory scrutiny, slowing economic growth and tensions between the U.S. and China have held back IPOs in Greater China over the past three years.
In its report, EY said the number of IPOs and proceeds in the U.S. increased significantly in the first half of 2024 compared to the same period last year, while mainland China and Hong Kong saw a sharp decline in listings.
Shanghai-based Chan said many of the macro trends are now starting to turn around, which could further boost IPOs in Hong Kong.
“We’re seeing a reversal in trends,” he told CNBC. “We’re seeing a lot more of these trends. [U.S. dollar] Hong Kong funds are returning to Hong Kong, mainly because Hong Kong has already priced in this uncertainty.”
The Hang Seng Index is up more than 5% this year after four straight years of declines, the worst consecutive losses in the index’s history, according to Wind Information.
“Our Hong Kong cap markets team has been extremely busy and has a strong pipeline for the second half of the year, with a number of expected listings on the Hong Kong Stock Exchange,” Marcia Ellis, global co-chair of private equity at Morrison & Foerster in Hong Kong, said in an email on Wednesday.
She said many companies that had been waiting to list on mainland China’s A-share market had decided to switch to listing in Hong Kong. [China Securities Regulatory Commission] There had been delays in getting approval, but recently our team has obtained the CSRC approval quite quickly.”
China announced new measures to boost venture capital in June and authorities have vowed to support IPOs, especially in Hong Kong, so investors and analysts are watching the speed of IPO approvals for signs of bigger changes.
Another factor supporting Hong Kong IPOs is that many of the companies listed on the Hong Kong market are based in mainland China, and the country’s economic growth is “fairly satisfactory,” Chan said.
He expects consumer companies could benefit from IPOs in the short term.
“As the economy slowly recovers, many in China are becoming more willing to spend,” he said, noting that this is particularly evident in developing regions.
Official state-level data showed China’s retail sales growth has slowed, rising just 3.7% year-on-year in May, compared with growth rates of nearly 10% or more in past years.
Importantly for global asset allocation, the Federal Reserve and other major central banks have refrained from aggressively raising interest rates, making government bonds a more attractive investment option than initial public offerings (IPOs) for many institutional investors.
“If interest rates are cut by another 1 percentage point or so, it will have a big impact on the IPO market,” Chan said.
In a report released late last month, EY said that Hong Kong IPOs raised $1.5 billion in the first half of this year, down 34% from 2018. In 2021 and 2020, the Hong Kong Stock Exchange saw nearly 100 IPOs per year, raising tens of billions of dollars, according to the report.
By comparison, mainland China IPOs raised $4.6 billion in the first half of 2024, down 85% from the same period last year, according to EY.
Hong Kong Exchanges and Clearing Co. Chief Executive Bonnie Chan, who is not related to EY’s George Chan, said at a conference last week that the exchange has received 73 new listing applications so far this year, up 50% from the second half of last year.
“The pipeline is building nicely,” she said, noting that there are about 110 IPOs in total waiting to list in Hong Kong. “All we need is favorable market conditions for these IPOs to launch and be properly priced,” she added.
“What we need is a strong pipeline,” EY’s Chan said, “interested investors with capital to invest, and strong aftermarket performance.”
Hong Kong IPO returns are improving: EY estimates that the average first-day return for new listings on the Hong Kong Stock Exchange in the first half of 2024 was 24%, significantly higher than the average of 1% in the same period last year.
“The after-market performance of Hong Kong IPOs has been much better than in the past five years,” Chan said. “Taken together, we expect the Hong Kong market to trend upward.” [in the] “Over the next five years”
Chan said he expects deal volume to increase in the second half of 2024.
He said they would probably be mid-range in size, between HK$2 billion and HK$5 billion (US$260 million to US$640 million), but added that he expects market momentum to gain further momentum by 2025.
Slowing economic growth and geopolitical uncertainty are also weighing on early-stage investment in Chinese startups.
Total venture funding from foreign investors for Greater China deals plummeted to $19 billion in 2023 from $67 billion in 2021, according to alternative asset research firm Preqin.
In a report last month, the company said U.S. investors had not participated in any of the big deals in recent years, but that Greater China investors remained involved.
EY’s Zhang said data security rules will remain an obstacle for Chinese IPOs in the U.S., but he expects the current scrutiny over listings to be “temporary.”
The China Securities Regulatory Commission formalized new rules in early 2023 requiring domestic companies to comply with national security measures and personal information protection laws before listing overseas. China-based companies with more than 1 million users must pass Beijing’s cybersecurity review in order to list overseas.
“As time goes on, as people become more familiar with Chinese, [securities regulator] As the approval process improves and more large companies become comfortable with geopolitical tensions, more of them will consider… [the] The final destination is the US market,” Chan said.
“When the time comes, I think institutional investors will be interested in these big Chinese companies because they want to make money.”
He declined to comment on specific IPOs, saying some high-profile listings are “isolated events.”
Didi, the Chinese ride-hailing company that was delisted in New York in 2021, has denied reports that it plans to list in Hong Kong next year. CNBC reports that Shein, a fast-fashion company that does most of its manufacturing in China, is seeking to list in London after facing criticism in the US.
