Hong Kong plays an important financing role for mainland private enterprises

Private enterprises have contributed tremendously to China's economic growth over the past four decades of economic reform and will continue to assume a significant role in the current round of economic transformation into a new economy driven by innovation and entrepreneurship.

By 2018, private enterprises were contributing more than 50 percent of tax revenues, 60 percent of gross domestic product, 70 percent of technological innovation, 80 percent of urban employment and 90 percent of the job creation. Their contribution is recognized and has been encouraged by China's leadership, which has provided longstanding policy support. However, they are still experiencing difficult times in getting sufficient financing in the onshore market. The major reasons for this include direct financing channels not offering enough support which means that their share of enterprise funding is still low, the rebound in the leverage that worsens their bargaining power in getting further funding and the intense competition with State-owned enterprises for both equity financing and bond financing as well as bank loans.

As a result, the shares of equity financing and bond financing to private enterprises remains low, accounting for about 14 percent of total social financing flows last year. Despite the launch of the Science and Technology Innovation Board (STIB) in Shanghai in June 2019, private enterprises accounted for only about 49 percent of the total funds raised by initial public offerings (IPOs) in the mainland market in 2019 (although this was up from 41 percent in 2018). Besides, funding through shadow banking channels (for example share pledges) has been tightened. They are desperately in need of more funding support.

Among the policy support to private enterprises is the promotion and encouragement of their offshore financing through stocks and bonds. In this regard, Hong Kong has been the largest offshore funding center in equity financing and bond financing. This is especially beneficial to private enterprises given their domestic funding difficulties. Compared to the mainland market, the market in the Hong Kong Special Administrative Region offers more timing certainty of funding, market-driven valuation and the reach of global investors. These contribute to a level-playing field for fund-raising by enterprises, irrespective of the enterprise's sector and ownership.

The Hong Kong market is the world's largest offshore equity financing center for mainland private enterprises. The majority share of funds raised by IPOs and secondary offerings by mainland enterprises in the Hong Kong market in 2019 fell onto mainland private enterprises. During 2019, the IPO funds raised in Hong Kong by mainland private enterprises reached Hong Kong $202.9 billion ($26.2 billion), which accounted for about 79 percent of the total IPO funds raised in Hong Kong by all mainland enterprises. Moreover, the Hong Kong market implemented listing regime reform in April 2018 to allow the listing of companies with weighted voting rights (WVR), biotechnology companies which are not yet in profitable stage as well as secondary listing of mainland enterprises. These would be new-economy companies, including many private enterprises. Under the new listing regime, the tech giant Alibaba raised about $13 billion through its secondary listing in November 2019 on the Hong Kong market.

Hong Kong is also the largest offshore bond financing for mainland enterprises. These include the issuance of dim sum bonds, bonds denominated in Chinese renminbi and issued in Hong Kong, and foreign currency-denominated bonds in Hong Kong, which benefit from lower funding costs than in other offshore centers. Mainland enterprises have dominated the issuance of dim sum bonds and Hong Kong accounted for about 80 percent of total issue amount in 2019 (151 billion yuan). As for the US dollar-denominated bonds issued by mainland enterprises, Hong Kong accounted for about 60 percent of total issue amount in 2019 ($150.6 billion).

As a leading center of offshore financing for mainland enterprises, the Hong Kong market provides a wide spectrum of offshore renminbi risk management tools for their exchange rate risk management in the light of the currency mismatch. According to the triennial survey of the Bank for International Settlements, Hong Kong remained the world's most active over-the-counter market for renminbi turnover in 2019, including spot and other OTC FX instruments. Besides, renminbi currency futures with multiple currency pairs are available for hedging in the Hong Kong market.

The global liquidity channeled through the Stock Connect and Bond Connect schemes also helps boost the domestic liquidity of the onshore stock and bond markets. This supports the domestic financing activities of mainland enterprises. The enhanced foreign access to the mainland stock and bond markets has increased global recognition of the markets and facilitated the inclusion of mainland securities into global benchmarks, which further drives up foreign participation and domestic liquidity. For example, the number of registered investors in the Bond Connect scheme reached a record high of 1,668 as of end-January 2020. The global connectivity offered by the Hong Kong market gateway provides strong support to funding for all mainland enterprises.

Ba Shusong is chief China economist at Hong Kong Exchanges and Clearing Limited (HKEX). Daniel Law is an assistant vice-president at Chief China Economist's Office at the HKEX. The author contributed this article to China Watch, a think tank powered by China Daily. Ba Shusong is chief China economist at Hong Kong Exchanges and Clearing Limited (HKEX). Daniel Law is an assistant vice-president at Chief China Economist's Office at the HKEX.

The author contributed this article to China Watch, a think tank powered by China Daily. The views and opinions expressed in this article are those of the authors and do not necessarily represent the position of HKEX.