Eyeing home and looking beyond quick fixes

China Resources Microelectronics Limited, which went public on the STAR Market in Shanghai on Feb 27, 2020, is the first returning company that did not have to change its red-chip structure. Ever since, five other hitherto US-listed companies returned to the A-share market treading the same path, with telecom juggernaut China Mobile being the latest.

The problem, however, is that less passive investment will be directed to such returning companies. Although the A-share market has been included in the world's major indexes such as the MSCI and FTSE Russell, and some investment products do passively follow their choices of stocks, a limited number of A-share companies have been selected so far in such indexes.

At present, the A-share market's weighting in the MSCI Emerging Markets Index is about 4.2 percent, equal to $157 billion worth of foreign capital inflows into the A-share market since the inclusion three years ago. International investors, however, currently hold about $1.8 trillion worth of shares of US-listed Chinese companies, said Han of Zhejiang University. Insiders are not sure if the A-share market can attract that level of investment if US-listed Chinese companies return home.

In this context, the Hong Kong stock market is perhaps better placed. As calculated by UBS, 19 US-listed Chinese companies have made a secondary listing in Hong Kong, and their combined market value is as much as 60 percent of the total market value of all US-listed Chinese companies.

Another 50 companies of the kind are expected to return to the Hong Kong bourse this year. Based on that, the 70-odd returnees will likely account for 97 percent of the market value of all the US-listed Chinese companies.

The size and liquidity of the Hong Kong stock market have been frequently questioned. Its daily trading value is only one-eighth of its US counterparts. But a "dynamic" perspective should be taken to understand the current difference, said Hu Yifan, regional chief investment officer and head of macroeconomics for Asia-Pacific with UBS Global Wealth Management.

If investors still hold a positive outlook on China's economy and wish to continue their investment in US-listed Chinese companies, they will come to the Hong Kong market anyway, said Hu.

The current average daily trading value of the A-share market is about $200 billion, which is quite considerable. Although the returned US-listed Chinese companies are not included in the stock connects linking Shanghai, Shenzhen and Hong Kong at present, it will not take long to make that change. The capacity of the Hong Kong market will be thus increased, she said.

The Hong Kong bourse effected a revision at the beginning of this year, allowing non-innovative Chinese mainland issuers without a weighted voting rights structure to make secondary listings under more relaxed requirements.

As an international hub, Hong Kong is ready to welcome quality US-listed Chinese companies, said Hong Kong Secretary for Financial Services and the Treasury Christopher Hui Ching-yu in early April. The market choices will be thus enriched and liquidity will be increased, he said.

But once the regulatory disputes are settled by China and the US, the outbound reach of Chinese companies will resume.

The Chinese government will continue to support various enterprises seeking overseas listings, the Financial Stability and Development Committee under the State Council, China's Cabinet, stated at its March 16 meeting, which was presided over by Vice-Premier Liu He.