Western newswire services are reporting that the blockbuster IPO of Ant Group has started preparations for its dual listing process (STAR & HK stock exchanges) while US-China relations are tense.
Alibaba owns 33% of its shares, and co-founder Jack Ma owns 8.8%, but with over 50% of voting power. The plan is to sell 10% of Ant Group shares on Shanghai’s STAR and 5% on the Hong Kong Stock Exchange.
Westerns are not familiar with Chinese stock exchanges because they are not open to foreign investors. Despite the easing of capital controls and other restrictions, to date foreign ownership of Chinese shares listed on these exchanges account for 5.4%.
The other major difference between US and Chinese stock exchanges is the low level of institutional holdings in the East.
In 2019, 99.6% of total investors in China’s stock markets were retail investors! This is the reason, we Westerners liken Chinese stock markets to casinos as there are few sophisticated investors involved.
In the US, 38% are retail investors and 62% institutional.
Chinese corporates are used to cover their financing needs either through retained earnings or via bank loans. A very small percentage – circa 5% – of Chinese companies fund themselves by equity. This means that Chinese stock markets play a secondary role in the Chinese economy and in capital markets.
The three major Chinese stock exchanges (2 in China and one in HK) are circa 30yrs old. They started functioning in the 1990s. Although the Shanghai Stock exchange was first launched back in 1860s but then shut down. STAR is only one year old.
The Shanghai and Shenzhen stock exchanges have large electronic order books (EOBs) similar to NASDAQ. The number of companies listed on each of the Chinese stock exchanges are healthy.
Shanghai Stock Exchange (the oldest)
- Market Capitalization: $4.7 trillion
- Number of Listed Companies: 1,561
- EOB Value of Share Trading: $8 trillion
Shenzhen Stock Exchange
- Market Capitalization: $3.5 trillion
- Number of Listed Companies: 2,268
- EOB Value of Share Trading: $11.5 trillion
China’s Science and Technology Innovation Board (STAR)
- Market Capitalization: $343 billion
- Number of Listed Companies: 130
Hong Kong Stock Exchange
- Market Capitalization: $4.5 trillion
- Number of Listed Companies: 2,477
- EOB Value of Share Trading: $1.9 trillion
- Market Capitalization: $29 trillion
- Number of Listed Companies: 2,300
- EOB Value of Share Trading: $14.4 trillion
- Market Capitalization: $10 trillion
- Number of Listed Companies: 3,300
- EOB Value of Share Trading: $16 trillion
Ant Group will not have a US ADR listing anytime soon. I don’t think it will have an LSE GDR listing either, anytime soon. Last June, the UK and China signed the London-Shanghai Stock Connect agreement which allows for certain Chinese companies to raise capital via an LSE listing and for large UK listed companies to issue a form of shares in Shanghai. Since then there have been only two listings and the London-Shanghai Stock Connect has only worked one way. Huatai Securities, a Chinese brokerage listed on LSE (HTSC) from the Jiangsu province, who raised US$1.54 billion a year ago. And the 4th largest Chinese insurer based in Shanghai, China Pacific Insurance (Group) who listed last month (CHPXY) and raised $1.8billion.
There are important politics that are disconnecting capital markets and specifically, stock exchanges. There are also major structural differences between the Chinese and Western economies that are also reflected in their stock markets. The West has a significant institutional involvement that is solid and could even grow more. Retail has a lesser impact on stock markets (maybe Robinhood will change this and for certain Robinhood favorites `instill and import` a gambling culture). The West is addicted to equity financing and share buybacks and bond issuance, whereas China is not. These imbalances will inevitably change. The trend for private Western companies (especially European) to raise capital in Hong Kong cannot but eventually spill over to public markets.
Politics create frictions and dis-connections. Capital markets find ways to circumvent these (at a cost of course).
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