Why HK equity financing role for China still matters

Alicia Garcia Herrero's picture

HONG KONG - The longer Hong Kong's political crisis remains unsolved, the more adverse its effect  -- and the grip of such turbulence could spill over to mainland China, at least in the sectors which are heavily dependent on Hong Kong as a source of capital . . .

WITH more funding activities by Chinese firms supported by the higher market share of Chinese banks, Hong Kong has evolved from a broad-based international financial centre to a China-dominated offshore centre.

Given the uncertain times in Hong Kong, the growing geopolitical risks and the slowing Chinese economy, it is relevant to have a more granular look into the relevance of Hong Kong for mainland China in finance.

In this note, Natixis looks into equity financing by Chinese firms to assess the relative importance of Hong Kong in their equity financing.

The analysis should shed light on the differences across sectors of a tougher environment in Hong Kong for fund-raising.

Natixis finds that 33% of equity financing by Chinese firms took place in Hong Kong between 1997 and 2018.

From the sectorial perspective, Chinese financial institutions and property developers are the most dependent on Hong Kong, with 53% and 50% of their initial

public offerings (IPOs) and additional share and rights issuances placed in the city.

To a lesser extent, but still very relevant, corporates in health care, energy, infrastructure and utilities obtained 30-40% of their equity financing in Hong Kong during the same period.

Taking a broader view beyond Hong Kong by including the US, the offshore equity financing reliance of information and communications technology (ICT) and consumer firms increases massively to 35% and 42% respectively.

Given the size of the two sectors, their high reliance on overseas equity financing points to the risks in a sudden stop of USD financing in a full-fledged trade war and.the current problems in Hong Kong.

All in all, the high reliance of Chinese firms on Hong Kong for equity finance could be one of the key risks to watch in the next few months, given the sour relationship between the US and China and the current Hong Kong situation.

Alicia Garcia Herrero is Chief Economist for Asia-Pacific of Natixis