Companies won’t abandon Hong Kong yet

The political unrest in Asia’s premiere financial hub has taken a dark, violent turn this week. But the turmoil is not scaring investors and companies away — at least, not yet.

Hong Kong looks likely to retain its crown as the top stock exchange for IPOs in the world this year, according to data from Refinitiv. The city already hosted a blockbuster listing from AB InBev earlier this fall, and is now gearing up for Alibaba’s secondary listing in the coming weeks. The latter could lift the Hong Kong exchange above the New York Stock Exchange and the Nasdaq as this year’s largest venue for public offerings.

“I haven’t seen the turmoil here [in Hong Kong] affect the investment scene yet,” said Houston Huang, China head of global investment banking for JPMorgan. He pointed out that many of the big companies listed in Hong Kong don’t rely on the city for its business, and so are not affected by protests.

“Plus, all the conditions that make Hong Kong one of the best trading and investment platforms haven’t changed,” he adding. For example, the city has programs that facilitate investment between China and the rest of the world. “I don’t see its standing as a financial center shaken.”

A growing market

Despite the rise of mainland cities such as Shanghai and Shenzhen, Hong Kong is still China’s global financial center. Chinese companies use the city as a place to raise capital and broaden their investor base, or as a launch pad for overseas expansion. Many Chinese investors use Hong Kong as a way to spend money abroad, too.

Importantly, though, the rest of the world also uses Hong Kong as a gateway. The city’s semi-autonomous legal system and close ties to the mainland afford western companies an important link to the world’s second biggest economy.

The city’s IPO market is a key measure of confidence for companies that are looking to raise capital and investors. Proceeds from public offerings in Hong Kong have reached $22.3 billion this year, according to Refinitiv data, putting it third behind the Nasdaq and the New York Stock Exchange.

“China is still the fastest growing market in the world. Investors are enthusiastic in tapping the opportunities here,” Huang said, adding that Hong Kong matters financially, too. “Despite what has happened in the street, I don’t think its role as a crucial conduit for money between China and the rest of the world will diminish. At least not now.”

AB InBev’s roughly $5 billion listing of its Asian business in September, for example, was the second largest of the year behind Uber’s IPO in New York. The AB InBev offering acted as a catalyst for capital to continue flowing into the market, Huang said.

IPOs in Hong Kong have jumped since AB InBev started trading in late September. In October, 22 companies debuted on the Hong Kong market, compared to seven in September and one in August. There have been 16 new listings in November so far.

Alibaba, meanwhile, could raise as much as $13.4 billion by issuing 500 million shares in its secondary listing in Hong Kong, according to a prospectus for the transaction filed with the SEC on Wednesday.

Short-term worries

That’s not to say the market has been entirely calm. As protests in Hong Kong escalated this week, the benchmark Hang Seng Index took a tumble. The index closed down nearly 2% on Wednesday and has lost more than 4% so far this week, putting it on pace for its worst week in more than three months.

Property and retail stocks have been hit hard as things get worse for the local economy, which recently sank into its first recession in a decade. Hong Kong airline Cathay Pacific said Wednesday that inbound passenger numbers fell 35% year-on-year in October, and it warned that its earnings in the second half of 2019 would be significantly weaker than the first six months of the year.

Protesters even blocked streets this week in the city’s central business district — an uncommon daytime sight during the more than five months of demonstrations.

Traders, though, see the stock market’s shakeup as a short-term issue.

“Overall, the market is dominated by companies whose businesses are located elsewhere, mostly in China,” said Ken Wong, Asia equity portfolio specialist at Eastspring Investments. “I would say the US-China trade war is a bigger factor driving the market in the longer term.”

The Hong Kong stock market is actually still showing a positive return for 2019. The Hang Seng Index, which mostly comprises Chinese companies, has risen 2.8% since the beginning of the year.

“The protests are a geopolitical event. But in the business world, there is a different story,” Wong added.

Money market strains

There are some signs of tension within Hong Kong’s financial markets. The city’s one-month interbank offered rate, a short-term borrowing rate between banks, hit 2.39% on Wednesday — the highest in three months.

A higher interbank loan rate means that it is more expensive to borrow money, and is usually triggered by an outflow of capital.

The Hong Kong Monetary Authority — the city’s de factor central bank — said earlier this week that the city’s banking system remains solid and has ample liquidity.

Wong, meanwhile, said that the loan rate was far lower than during the 1997 Asian financial crisis and the 2008 global financial crisis.

“In 1997, tensions were high on Hong Kong’s financial market, as the Hong Kong dollar and the banking system were attacked,” he said. “But today, the financial system is solid. I haven’t seen any panic yet.”