Structure and mainland Chinese cooperation
With its two trading boards, the Hong Kong bourse is home to large enterprises and upcoming companies alike. In total, 2,597 companies are listed on the exchange and the market is among the most popular destination for companies’ IPOs. Since companies and their needs are very different, the Hong Kong Exchange has two separate trading boards. The primary market is the Main Board which is home to large, mature companies that have past financial records and surpass a minimum public shareholding, among others. In contrast, the listing requirements on the Growth Enterprise Market (GEM), which is geared towards startups, are lower to give young companies easier access to capital. Therefore, investments into equity on the GEM are much riskier than investments into companies on the Main Board.To facilitate Hong Kong’s role as a financial gate, the authorities have introduced a series of programs that facilitate the connection between the Hong Kong Exchange and mainland Chinese stock markets. For instance, the Shanghai Stock Exchange and the Shenzhen Stock exchange have established an investment channel with the Hong Kong Exchange that allows investors to trade on both markets without intermediaries. Other corporations are the Mutual Recognition of Fund and the Bond Connect, both programs that enable the establishment and trade of cross-regional funds and bonds.
A blessing and a curse
The strength of the Hong Kong Exchange comes from its unique position as a link between mainland China and the rest of the world. However, the same position also makes it very sensitive to events on both sides. Against the backdrop of increasing tensions between the PRC and the United States, many experts predicted that Hong Kong would be the profiteer. An observation that was supported by the redirection of IPOs from New York to HKEX after the Chinese government increased the regulations for Chinese companies to list on American stock markets. Furthermore, the common perception among analysts was that stricter capital controls on both sides would facilitate Hong Kong’s role as a financial link between markets.Despite the rosy predictions, Hong Kong is currently the recipient of the short end of the stick from both sides. In reality, the economical and political proximity to mainland China has become more of a liability. Even though some big companies, including Meituan and NetEase, came to Hong Kong, many new deals with mainland Chinese companies have not materialized. Even worse, overseas investors lose faith in the prosperity of the market in Hong Kong and see its close relationship with the Chinese government as a risk. In particular, economic weaknesses in mainland China are going to be felt on the Hong Kong Exchange and the increasing control of the PRC over Hong Kong threatens the financial liberties that so many foreign investors enjoyed.
