Charles Li interpreted concept of “primary equity connect”

Charles Li, CEO at Hong Kong Exchanges (HKEx), yesterday talked about “primary equity connect” concept of HKEx’s new strategy in his latest blog for the first time, discussing the feasibility to extend the model of Shanghai-Hong Kong Stock Connect program into the new share market. Charles indicated that the “primary equity connect” program based on the said model could provide a new path for inland China to realize supervisory cooperation, mutual assistance in law enforcement and benefit sharing of the stock exchanges, just like the existing Shanghai-Hong Kong Stock Connect program.

The “primary equity connect” is an extending model of Shanghai-Hong Kong Stock Connect program being researched by the HKEx, which will extend the existing “stock connect” model into the primary market from the secondary one to allow the investors of Hong Kong and inland China can subscribe the new shares, including IPOs and additional issuance of new shares, issued in the two markets in the future, according to Charles’ introduction. There are two types in detail: “inland investment in HK” (allowing inland investors to subscribe new H shares) and “foreign investment in HK” (allowing international investors to subscribe new shares listed in inland market through HK).

The “primary equity connect” program will provide huge double-win opportunities for the two markets, if the said concept can be realized, pointed out Charles. For inland market, “inland investment in HK” can make inland investors widely invest the large international companies under the system of Shanghai-Hong Kong Stock Connect program, and effectively solve their “insufficient assets” issue. The “foreign investment in HK” can help inland companies attract more international institutional investors, improving the investor structure and pricing mechanism of the new share issuance. For HK, “inland investment in HK” under the “primary equity connect” can enrich the HK market flow, attracting famous companies worldwide to massively list in HK market; and “foreign investment in HK” will further improve HK’s competitiveness to maintain the first choice for international investors stepping into inland assets market.

Although there are many benefits to realize the “primary equity connect” program, review and approval mechanisms for listing are totally different in HK and inland China, a lot of problems still need to be solved to realize the said program.

It is analyzed that “inland investment in HK” should face no legal impediment in HK, but requiring permission from the inland regulators. However, Charles did not think that it is an unbridgeable regulatory obstacle, as the existing supervisory terms of Shanghai-Hong Kong Stock Connect program have already covered the terms related to new share additionally issued by the listed companies in HK market to inland investors. The “primary equity connect” program will smoothly start its southward journey, if the inland regulators can further permit IPO subscription from additionally-issued new share subscription.

In terms of the said “foreign investment in HK”, Charles indicated that the inland market is always desired to attract overseas institutional investors, and allowing them to subscribe the new shares in the A-share market meets the general orientation of inland capital market’s openness to the outside world. Referring to HK, “foreign investment in HK” is only available to professional investors, and HK regulators have no serious concerns, but the HK supervisory regulations must be adjusted, if it is open to HK retail investors.

It is not a must to push out the both types at the same time, stated Charles yesterday, “foreign investment in HK” could be the first one, if the inland market is afraid the possibility to worsen capital outflow. But he believed that, under the mechanism of Shanghai-Hong Kong Stock Connect program, safety is controllable, even if “inland investment in HK” is carried out, as the capital is just circulating in a closed system, not triggering capital outflow.

But Charles also pointed out that the “primary equity connect” is just a preliminary concept proposed by the HKEx, detailed operations still need to be deeply discussed and guided by the both regulatory authorities of the two markets.

In terms of “Three Board” attracting much market attention, Charles indicated that its overall principle is: “easy entry and exist, welcome favorable companies, and clear up bad ones”. Generally speaking, the “Three Board” is a Plan B, if the stock reform cannot be initiated, and the regulators can consider totally new listing rules in this board: on one side, a relatively-easing entry threshold should be set, not blocking potential favorable companies; on the other side, investor protection measures and market exist standard should be reinforced, accelerating the process to force bad ones exiting from the market, but this should be gradually implemented with details waiting to be studied.