Hong Kong Exchanges Ditch Requirement for Separate Votes by Chinese Companies
Hong Kong’s stock exchange operator, Hong Kong Exchanges and Clearing (HKEX), has made a significant change to its listing rules that gives mainland Chinese companies an advantage over Hong Kong-listed stocks. The tweak eliminates the requirement for companies incorporated in China to hold separate shareholder meetings for their onshore and offshore investors on rights issues and share repurchases. This move is likely to attract global funds to trade stocks on the mainland instead of in Hong Kong.
Tweak to Listing Rules Gives Mainland Stocks Advantage Over Hong Kong
The recent change to Hong Kong’s listing rules impacts around 150 dual-listed companies and forms part of HKEX’s listings rules revamp that went into effect this month. It follows an earlier revision to the offshore-listings policy by the China Securities Regulatory Commission in March. The change frees companies from treating Hong Kong H-shares as a separate class of stock from A-shares in Shanghai and Shenzhen.
Arguments for and Against Ditching Separate Shareholder Meetings
While the elimination of separate shareholder meetings makes sense from a legal and practical standpoint, it has raised concerns among major groups like BlackRock, the Asia Securities Industry & Financial Markets Association (ASIFMA), and the Asian Corporate Governance Association. They argue that A and H shares are not fungible, trade in different currencies, and are subject to different risks. Thus, additional protections for owners of Hong Kong-listed stock are warranted.
Potential Disadvantages for Hong Kong Shareholders Under New Rules
The premium that A shares command over H shares puts Hong Kong shareholders at a disadvantage under the new rules. In scenarios such as rights issues, where one subscription price is set above the H shares but at a discount to A shares, owners of the latter benefit. This could lead to more onshore shares being issued relative to offshore shares, further diluting minority owners in Hong Kong. To address this concern, HKEX is considering a minimum H float requirement.
New Rules May Impact Global Fund Managers’ Allocations to Chinese Equities
The elimination of the requirement for separate shareholder meetings may take some time to have a significant impact on the market. Companies that wish to adopt the new system will need to obtain two-thirds approval from each set of shareholders. However, the move further enhances the appeal of trading on the mainland, where Shanghai and Shenzhen offer more liquidity, richer valuations, and better long-term returns. As global fund managers consider their allocations to Chinese equities, a less appealing Hong Kong market awaits them.
The decision by Hong Kong Exchanges and Clearing to remove the requirement for separate shareholder meetings for Chinese companies incorporated in China has significant implications for the Hong Kong stock market. While the move aligns with the changing landscape of China’s domestic securities laws and offers greater convenience for listed companies, it raises concerns about the protection of minority shareholders in Hong Kong. As global fund managers reassess their allocations to Chinese equities, the trading landscape may shift towards the mainland, leaving Hong Kong with fewer attractions for investors.
Analyst comment
Neutral news: The decision by Hong Kong Exchanges and Clearing to remove the requirement for separate shareholder meetings for Chinese companies incorporated in China has both advantages and disadvantages. It aligns with China’s domestic securities laws and offers convenience for listed companies. However, it raises concerns about the protection of minority shareholders in Hong Kong. As global fund managers reassess their allocations to Chinese equities, the market may shift towards the mainland, leaving Hong Kong with fewer attractions for investors.
