Oct 19, 2019 03:36 AM

China Allows Access to Dual-Class Stocks Listed in Hong Kong

Rules revised to include dual-class stocks in Hong Kong to be traded by mainland investors. Photo: VCG
Rules revised to include dual-class stocks in Hong Kong to be traded by mainland investors. Photo: VCG

(Bloomberg) — China will allow onshore investors to buy dual-class shares traded in Hong Kong for the first time, giving them access to some of the world’s hottest startups such as Xiaomi Corp. and Meituan Dianping.

The country’s stock exchanges revised rules Friday to bring stocks with different classes of voting rights into the trading links between the mainland and the former British colony. The rules will be effective Oct. 28, according to announcements on the social media accounts of the Shanghai and Shenzhen stock exchanges.

The announcement elevates the importance of the Stock Connect program at a turbulent time as protests in Hong Kong enter their 20th week. Hong Kong Exchanges & Clearings Ltd. this month dropped a 29.6 billion-pound ($38.1 billion) unsolicited takeover bid for the London Stock Exchange Group Plc, which cited an existing partnership with the Shanghai bourse as its “preferred and direct channel” to access China.

Hong Kong Exchanges and Clearing (HKEx), which operates the city’s stock exchange, in April 2018 revised its regulations to allow companies with dual-class shares, also known as weighted voting rights, to list after years of debate and the loss of Chinese technology giant Alibaba Group Holding Ltd.’s $25 billion IPO to the U.S. in 2014. Access to mainland capital through the Stock Connect program is a selling point to attract new listings.

But mainland exchange regulators in July 2018 decided that such stocks would be temporarily excluded from the Stock Connect programs, citing mainland investors’ lack of understanding of such assets and related risks.

Experts said the exclusion reflected heating competition between Hong Kong and mainland bourses to attract high-tech startups to list on their markets.

In August, stock exchange operators in Hong Kong, Shanghai and Shenzhen said they agreed to work on rule changes that would allow mainland investors to trade Hong Kong-listed dual-class shares through the Stock Connect programs.

Chinese authorities have been trying to find ways to keep trading in the country’s tech companies at home. Last year they worked on plans for depository receipts, which were designed to let dual-class shares not permitted on its major exchanges to trade onshore. A new trading venue, known as the STAR Market, allows the structure and recently approved the first company with unequal voting rights to list.

HKEx’s years-long push for weighted voting rights, which are often used by tech founders to keep control of their companies even after going public, was in part premised on China-based technology companies choosing Hong Kong over the U.S. because it’s easier for China’s domestic investors to trade via the Stock Connect. Alibaba, which uses the structure and is listed in New York, is said to be considering a Hong Kong listing, which could raise as much as $20 billion.

The bourse operator generated about 5% of its revenue from the links with stock exchanges in Shanghai and Shenzhen, according to its latest annual statement.


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