Asia's largest company says it has come home. Alibaba Group Holding (BABA) , listed here as HK:9988, is posting a two-day rise of 9.8% since its secondary listing in Hong Kong.
It's weird that the largest stock listing in the world so far this year should go ahead in Hong Kong at this time of tumult. But it demonstrates exactly why repeated forecasts of this city's demise are far off the mark.
Computerized traders must be making the most of the "fungibility" of the shares in Asia and the United States. Eight Hong Kong shares are worth one American Depositary Share, which are priced at US$194.70 on the NYSE, compared with an equivalent of US$197.47 for the Hong Kong shares based on their HK$193.20 close. We now have what promises to rise to US$12.9 billion in extra BABA shares, if the greenshoe is exercised as expected, trading here.
Hong Kong is always being written off. The city has been Lazarus-like in its recovery from certain death due to the Japanese invasion in World War II, and during the pro-Communist riots in 1967. Citizens and companies alike fled its shores ahead of the handover to China in 1997. There was no way it could survive the Asian financial crisis of 1997-98. It was sure to die when SARS struck in 2003. And so on.
Yet Hong Kong remains more hale than frail. I bet it will remain that way. Essentially, it will hold its position of strength as long as the Chinese Communist Party and Beijing government continue to be, bluntly, control freaks.
Alibaba is listing in Hong Kong to secure access both to the international pools of capital that lap this island's shores, and the flow of mainland money making its way out of Beijing's closed system of capital controls. Mainland investors pump money into Hong Kong via the "stock connect" schemes, as well as in suitcases of cash carried across the border. Although the e-commerce behemoth can't for now connect to the Shanghai and Shenzhen markets, due to its dual-unequal share structure, it likely won't be long before Beijing changes those rules.
Hong Kong already has. Alibaba should not have been able to join the Hang Seng Composite Index that is treated as the benchmark for Hong Kong market performance. Dual-unequal share structures weren't cleared for inclusion by the index provider until May 2018. That's when the listing of smartphone maker Xiaomi (XIACY) caused Hang Seng Indexes to change the rules. Secondary listings weren't allowed until this month: basically, "When Alibaba listed."
Hang Seng Indexes announced on Wednesday that Alibaba had met its "Fast Entry Rule," meaning it will take its place in the Hang Seng Composite Index at the start of trade on Monday Dec. 9. The new index weightings will come out after the close on Friday Dec. 6. Alibaba will also join the relevant related indexes such as the Hang Seng Internet & Information Technology Index, and the Hang Seng Composite LargeCap Index.
The changes appear to catch out even those compiling them. Hang Seng Indexes CEO Vincent Kwan last week told the South China Morning Post that secondary listings would only be considered for inclusion in its indexes after the conclusion of a consultation in May 2020.
The Hang Seng Composite Index is up 4.3% in 2019, despite a city in recession. It is dominated at the moment by the movements of financials and a few IT companies. Chief among them is gaming maker and WeChat operator Tencent Holdings (TCEHY) . Tencent has its primary listing in Hong Kong, and is the largest constituent of the Hang Seng, at 9.2%.
The second-largest component is the bank HSBC Holdings (HSBC) , at 8.2%. The surge in Asian wealth is driving growth for both client assets and revenue in HSBC's private-banking business, the unit's CEO tells Reuters in an interview today. "Asia is by far the region that is growing the most," Antonio Simoes says, comprising 42% of its private-banking assets.
HSBC is one of the few private banks with an onshore license to operate within mainland China. It has a presence in Shanghai, Beijing and Guangzhou. But it sees any growth there as a decades-long strategy governed by how regulations change. Offshore businesses, particularly those in Hong Kong and Singapore, are the primary way that private banks serve Asian money, including Chinese.
Despite the last six months of pro-democracy demonstrations here, money keeps arriving. Hong Kong has a freely convertible currency that's pegged to the U.S. dollar. Anyone can walk into a property brokerage here and buy an apartment (though nonresidents pay a heavier tax freight). You can open a bank account, or a brokerage account, with an ID, and move your money quickly and easily in and out of the city.
The same is not true in mainland China, where the yuan is held tightly to Beijing's chest. China's domestic A shares are open only to investors within its borders, and big foreign banks via a small quota. Most sane people would not want to buy them anyway, since they are driven to far higher valuations than justified by domestic retail investors. Those punters have nowhere other than the tightly regulated property market and A share stocks to invest.
Hong Kong was written off at its very outset. It was described as a "barren island with hardly a house upon it" by the British Foreign Secretary Lord Palmerston, as viewed from his London office. Palmerston then sacked the man, Charles Elliot, who negotiated its perpetual lease from the Qing Dynasty, for failing to secure sufficient concessions. Elliot, the chief superintendent of trade for Britain in China, was also a naval officer, and presciently saw the value in the deep-water harbor.
Hong Kong will retain its place for a different kind of trade, the kind that flickers on screens. The Alibaba listing demonstrates that. I'm sure the Beijing authorities are plotting ways, double time, for the markets in Shanghai to offer an alternative to those here in Hong Kong. But the pro-democracy demonstrations, in which we're basically demanding to select Hong Kong's mayor, prove how difficult it is for them to surrender even a modicum of control.