The Shanghai and Shenzhen stock exchanges said the restrictions were aimed at protecting mainland investors from buying shares they did not understand
The Shanghai and Shenzhen stock exchanges said the restrictions were aimed at protecting mainland investors from buying shares they did not understand © FT montage; EPA

When luxury Italian fashion brand Prada listed on the Hong Kong stock exchange in 2011, it was among a number of foreign consumer companies seeking to take advantage of the increasingly affluent population in mainland China while appealing to the local investor base.

For such companies, Hong Kong Exchanges and Clearing was a crucial hub for tapping emerging Asia.

But fast-forward seven years, and overseas businesses that are now looking to list on Hong Kong’s exchange potentially face a large stumbling block.

In a surprise announcement last weekend, China’s mainland exchanges said they would bar domestic investors from accessing foreign companies and businesses with multiple share classes listed on Hong Kong through Stock Connect, the trading link connecting bourses in China and Hong Kong.

According to the Shanghai and Shenzhen stock exchanges, the move was aimed at protecting mainland retail investors, a dominant force, from piling into shares they did not understand.

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Although the measures might be temporary, the ruling has cast a pall over HKEX. Analysts said blocking access to mainland investors in China could render HKEX a less attractive venue for overseas companies to list.

The latest measures are part of an escalating tussle between exchanges, as they vie for lucrative listings globally.

The initial announcement had also banned companies with dual-class shares, knocking smartphone maker Xiaomi, which listed in Hong Kong earlier this month as the first company with such a structure. However, the exchanges agreed this week to find a way of giving mainland investors access to dual-class shares listed in Hong Kong, after Charles Li, HKEX’s chief executive, flew to Beijing to resolve the issue.

Nonetheless, the decision over foreign companies could deal a blow to Mr Li’s hopes of luring oil company Saudi Aramco to list on its venue, analysts said.

“What really comes to mind is Aramco — the only attraction for them to list in Hong Kong is to access Chinese mainland investors, to have a much larger pool of investors,” said one analyst, who wished to remain anonymous.

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HKEX said it was not worried about the exclusion on foreign companies, saying it was likely to be temporary. “The exclusions are for the time being, not forever,” HKEX said. “We also expect there will be discussions of inclusion when a major foreign listing candidate comes up that is clearly in the interests of Hong Kong and the mainland.”

Tapping mainland investors is a key attraction for some overseas companies looking to list in Hong Kong. Stock Connect, which launched in 2016, allows individuals in China and Hong Kong to buy shares in each other’s markets without having to go through the laborious process of applying for regulatory approval.

Saudi Aramco is counting on overseas investors to buoy its listing, the timing of which is still uncertain.

Stephen Leung, an analyst at UOB Kay Hian, said: “If they could successfully get money from China, it would help the development a lot.”

China’s measures also deal a blow to Chinese investors, who might be seeking to tap a broader array of companies in Hong Kong to diversify and hedge against the recent renminbi depreciation, which this week hit a year-low against the dollar. The onshore renminbi crossed the Rmb6.8 a dollar mark on Friday.

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There are about 30 foreign companies listed in Hong Kong, a third of which would have been eligible for trading through Stock Connect, according to data from BNP Paribas. The listings include Prada, Canada’s Sunshine Oil and UK insurer Prudential.

Michael Wu, an analyst at Morningstar, said: “I don’t think it’s going to be a huge issue [for HKEX] because the majority of new listings are Chinese companies. So I don’t think it’s damaging to HKEX. There are plenty of Chinese companies that want to list in Hong Kong.”

But more broadly, the ruling has ramifications for other trading routes.

Jason Lui and Chris Yung, strategists at BNP Paribas, said the move could affect London-Shanghai Connect, a trading link set to launch this year that would allow investors in China and the UK to buy shares in each other’s equity markets on their domestic exchanges.

“The main appeal of the upcoming London-Shanghai Connect scheme is for mainland investors to access London-listed [foreign] shares which may contradict the decision to exclude foreign company shares from southbound trading,” they said in a note to clients.

Mr Lui and Mr Yung also warned that the ban on foreign companies could undermine ETF Connect, a trading link that would give Chinese investors access to Hong Kong-listed exchange traded funds, and Hong Kong investors a route to buy ETFs listed in Shanghai and Shenzhen.

“This decision may lead to uncertainties in the upcoming ETF Connect scheme as ETF investors may be passively buying foreign company shares,” they said.

While HKEX said the ban on foreign companies was “for the time being”, the issue is unlikely to top the Chinese regulator’s agenda, leaving the contest among exchanges for blockbuster listings wide open.

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