HONG KONG- Hong Kong has lost some permanent appeal. The city’s bourse operator has ditched a requirement for companies incorporated in China to hold separate votes for their onshore and offshore investors on rights issues and share repurchases. It’s a fresh reason for global funds to trade stocks on the mainland instead of those in the Asian hub.
The tweak impacting 150 or so dual-listed companies is part of Hong Kong Exchanges and Clearing’s (HKEX) listings rules revamp that went into effect this month. It follows an overhaul of the offshore-listings policy by the China Securities Regulatory Commission in March which frees companies of an obligation to treat Hong Kong H-shares as a separate class of stock from A-shares in Shanghai and Shenzhen.
On one level, this makes sense. A and H stock have the same ownership and voting rights. The introduction of two sets of approvals was mandated three decades ago when foreign investors wanted additional protections to invest in the first wave of Chinese firms listing in Hong Kong. China’s domestic securities laws have since developed and global investors can now directly buy shares onshore through various channels. What’s more, on issues like mergers and acquisitions, the two sets of shareholders have long voted as one class.
Ditching separate meetings removes an effective veto and outsized influence global fund managers held over stock issuance and buybacks because H shares usually represent a minority of a Chinese company’s total shares outstanding. Unsurprisingly BlackRock the world’s largest money manager, opposes HKEX’s rule change, as do major groups like the Asia Securities Industry & Financial Markets Association (ASIFMA) and the Asian Corporate Governance Association. Their argument centers on an awkward reality: A and H shares are not fungible, trade in different currencies and are subject to very different risks, thus justifying additional protections for owners of Hong Kong-listed stock.
They have a point. Over the past five years, A shares on average have traded at a 35 percent premium to their H share equivalents, according to the Hang Seng China AH Premium Index that tracks the gap for the most liquid dual-listed companies. As of Tuesday morning, the Shanghai shares of nearly 20 firms, including $110 billion China Life Insurance and $26 billion automaker Great Wall Motor were trading at a price at least three times higher than their southern equivalents.
