Hong Kong Exchanges and Clearing, the city’s bourse operator, has made a controversial change to its listings rules that could drive global funds towards mainland stocks. The change removes the requirement for companies incorporated in China to hold separate shareholder meetings for onshore and offshore investors on rights issues and share repurchases. While this aligns the requirements for all issuers, it has sparked concerns over the impact on minority shareholders, as A shares typically trade at a premium to H shares. Major groups, including BlackRock and the Asia Securities Industry & Financial Markets Association, oppose the rule change and argue that the differences between A and H shares justify additional protections for owners of Hong Kong-listed stock.
Hong Kong Exchanges and Clearing scraps separate shareholder meetings
Under its revised listings rules that took effect this month, Hong Kong Exchanges and Clearing (HKEx) has eliminated the requirement for companies incorporated in mainland China to hold separate shareholder meetings for onshore and offshore investors on rights issues and share repurchases. The change aligns the requirements for all issuers and is part of HKEx’s effort to streamline its listings rules.
Tweak risks driving global funds towards mainland stocks
The removal of separate shareholder meetings for onshore and offshore investors could drive global funds towards mainland stocks instead of those listed in Hong Kong. The change removes an effective veto and outsized influence that global fund managers held over stock issuance and buybacks. This is because H shares, which are listed in Hong Kong, usually represent a minority of a Chinese company’s total shares outstanding. The change has sparked concerns as A shares, which trade in the mainland, typically trade at a premium to H shares.
Controversial move impacts 150 dual-listed companies
The change to HKEx’s listings rules impacts around 150 dual-listed companies. The requirement for separate shareholder meetings was introduced three decades ago when foreign investors wanted additional protections to invest in the first wave of Chinese firms listing in Hong Kong. However, with the development of China’s domestic securities laws and the ability for global investors to directly buy shares onshore, the requirement for separate meetings has become obsolete.
BlackRock and industry groups oppose HKEx’s rule change
Major groups, including BlackRock, the Asia Securities Industry & Financial Markets Association (ASIFMA), and the Asian Corporate Governance Association, have opposed HKEx’s rule change. They argue that A and H shares are not fungible, trade in different currencies, and are subject to very different risks. They believe that these differences justify additional protections for owners of Hong Kong-listed stock.
Premium on A shares puts Hong Kong investors at a disadvantage
The premium on A shares poses a disadvantage for owners of Hong Kong-listed stock under the new rule change. For example, in rights issues, companies set one subscription price, and if that price is above the H shares but at a discount to A shares, owners of the latter benefit. This could result in more onshore shares being issued relative to offshore shares, further diluting minority owners in Hong Kong. The Hong Kong Exchanges and Clearing is considering a minimum H float requirement to address this concern.
The change made by Hong Kong Exchanges and Clearing to eliminate separate shareholder meetings for onshore and offshore investors has raised concerns among market participants. While the change aims to streamline the listings rules and align the requirements for all issuers, it could drive global funds towards mainland stocks instead of Hong Kong-listed stocks. The differences between A shares and H shares, including trading at a premium and exposure to different risks, have prompted major groups to oppose the rule change. It remains to be seen how this change will impact minority shareholders and the attractiveness of Hong Kong as a trading hub.
Analyst comment
Neutral news. The change made by Hong Kong Exchanges and Clearing aims to streamline listings rules, but it has raised concerns among market participants. It could drive global funds towards mainland stocks instead of Hong Kong-listed stocks. Major groups have opposed the rule change due to differences between A shares and H shares. It remains to be seen how this change will impact minority shareholders and the attractiveness of Hong Kong as a trading hub.
