HKEX Report丨HK's Role in Supporting the Fund-Raising of MPEs

Editor's Note

Mainland private enterprises (MPEs) 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. However, MPEs are still experiencing difficult times in getting sufficient financing in the onshore market. 

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

Author: Chief China Economist's Office, Hong Kong Exchanges and Clearing Limited

REPORT SUMMARY

Mainland private enterprises (MPEs) 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. MPEs’ contribution is well recognised and encouraged by China’s leadership through providing long-standing policy support. However, MPEs are still experiencing difficult times in getting sufficient financing in the onshore market. Major reasons include direct financing channels not offering enough support such that their share of enterprise funding is still low, the recent rebound in the leverage of MPEs that worsens their bargaining power in getting further funding and the intense competition with state-owned enterprises (SOEs) for both equity financing and bond financing as well as bank loans. As a result, the shares of equity financing and bond financing to MPEs came to their recent lows and MPE funding through shadow banking channels (e.g. share pledges) has been tightened. MPEs are desperately in need of more funding support.

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

In respect of equity financing, the majority share of funds raised by initial public offerings (IPOs) and secondary offerings by Mainland enterprises in 2018 fell onto MPEs. Moreover, the Hong Kong market implemented a listing regime reform in April 2018 to allow the listing of companies with weighted voting rights (WVR) and biotechnology companies which are not yet in profitable stage. These would be new-economy companies, including many MPEs. 

In respect of bond financing, Mainland enterprises issued dim sum bonds and foreign currency-denominated bonds in Hong Kong, with lower funding costs than in other offshore centres. As a leading centre of offshore financing for Mainland enterprises, the Hong Kong market provides a wide spectrum of offshore RMB risk management tools for their exchange rate risk management in the light of the currency mismatch.

Besides, the global liquidity channelled through the Stock Connect and Bond Connect schemes helps boost the domestic liquidity of the onshore stock and bond markets. This would support domestic financing activities of Mainland enterprises, including MPEs. 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. The global connectivity offered by the Hong Kong market gateway provides strong support to funding for all Mainland enterprises. This is particularly important to MPEs which have been facing obstacles in obtaining financing through domestic means.

Complementary to the Mainland market, the Hong Kong market will continue to exhibit its roles in supporting the offshore financing of Mainland enterprises, including MPEs.

FULL REPORT

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Source: HKEX official website, June 2019

Editor：Zhang Qihang