It has been a wild week for the stock market in Hong Kong. The Hang Seng index rallied strongly and inexplicably on Monday and Tuesday even as the fiercest fighting in six months of unrest was taking place. Market participants were left scratching their heads, with the small cut in short-term interest rates in China not enough to explain a 2.9% leap in two days.
Was it a technical jump? Program buying? Bottom feeding? Or had the Hong Kong or mainland authorities intervened to bolster morale?
A technical rally that fed into a short squeeze is the most likely conclusion. The Hang Seng has yet to break below the 25,000 barrier where it started the year. Its mainland-focused components are bolstered by growth that the Beijing government has "forecast" at 6% to 6.5% for the year. Though that may be a struggle, China will get to the lower end, probably 6.1%. The government hits its targets.
Any intervention at this point would be pointless. The Hong Kong market surrendered all those gains with a two-day, 2.8% loss by Thursday morning. Friday, amid confusing noises about a U.S.-China trade deal that is far from reality, saw Hong Kong stocks gain 0.5%.
The interest rate cut gave markets a boost on Monday, indicating China is ready to stimulate the economy despite sharply higher food prices. But the move had been signaled by a similar cut in the mid-term rate two weeks before.
Amid this all, Alibaba Group Holding (BABA) went for it with a secondary listing on the Hong Kong Stock Exchange. It successfully has priced 500 million shares at HK$176 (US$22.48) to raise HK$88 billion (US$11.2 billion), or US$12.9 billion if the overallotment option gets exercised as expected.
Gray-market trading has seen bids placed as high as HK$182 on Friday, according to Bloomberg, which would represent a 3.4% gain. The Hong Kong shares will officially start changing hands on Tuesday, Nov. 26. The U.S. shares are at US$184.86 before Friday trade, with each U.S. share worth eight of the shares in Hong Kong. The Hong Kong shares, at an equivalent of US$181, were offered at a 2.6% discount to the closing price that day in New York.
That's the largest stock offering in the world this year, at least until the oil company Saudi Aramco goes public in Saudi Arabia. Alibaba raised US$25 billion in what for now is still the largest initial public offering in history when it listed on the New York Stock Exchange in 2014. The Aramco offering, amid many a false start, is seeking to raise up to US$25.6 billion in Riyadh.
Alibaba has had false starts in Hong Kong, too. It originally sought to list here in the first place, but was confounded by rules on the Hong Kong exchange against dual classes of shares. That forced the e-commerce giant to move stateside. Hong Kong has since changed its rules to allow dual listings, which is a mistake in my book -- they basically allow tech company founders to sell shares to the public without giving them a corresponding say in how the company is run.
My belief is that if tech entrepreneurs want to sell shares to the public, they should have to give up some of their control, particularly over boards and committees that oversee issues such as how much they are paid. These entrepreneurs are not forced to sell shares to the public. Stay private, if you want to have total control.
Xiaomi (XIACY) sold dual-unequal class shares in Hong Kong in 2018, the first company to do so. The smartphone maker raised US$4.7 billion in June 2018, which gave it a valuation of US$54 billion, half what it had been touted at when 2018 began. Priced originally at HK$17, the stock is now worth HK$8.39, another 51% decline.
Like Xiaomi, Alibaba has seen very strong interest from retail investors. That's the main attraction of listing in Asia. Asian tech companies generate far greater interest from investors who are nearer the action. Alibaba is already the largest company in Asia, with a market capitalization of US$494 billion, well ahead of Hong Kong-listed gaming specialist Tencent Holding (TCEHY) at US$408 billion.
The size of the Alibaba offering makes the Hong Kong Stock Exchange the largest market in terms of equity raised this year. Nasdaq and the New York Stock Exchange are larger combined, but even while there is chaos on Hong Kong's streets, the trading screens here are doing fine business.
Though Alibaba, which operates the Taobao e-commerce web site and its luxury-site sister Tmall, has a different core business from Tencent, the rivals have entered similar segments. They overlap in areas such as cloud computing, artificial intelligence, autonomous vehicles and electronic payments. Alibaba can rely on strong customer loyalty to its sites and has bought almost all of Lazada, the largest e-commerce site in Southeast Asia. Tencent has the killer app WeChat, which is used for chat but also ordering taxis, splitting bills -- and cyber surveillance by the Chinese state.
The two companies will drive the performance of the Hong Kong stock market, making it far from a reliable indicator of what's going on with a Hong Kong economy ravaged into recession by the protests that began over a now-withdrawn proposed law to allow the rendition of suspects into China's rigged legal system. Those protests have since morphed into a pro-democracy movement and a broad opposition to the Hong Kong government.
Hong Kong goes to the polls on Sunday as pro-democracy demonstrations continue and the police wait out a remaining handful of protesters stuck in PolyU. This being Hong Kong, the race for district counselors is one of the few ballot-box opportunities we get. The city's leader, the Chief Executive, continues to be selected by a cabal of business executives and members of congress hand-picked by Beijing.