Hong Kong’s bourse operator is undergoing a stern test to restore its allure as a top equity trading and fundraising venue as ramped-up reform measures have yet to prove effective amid flagging market sentiment.

Although regulatory changes and cheap valuations could provide short-term relief, economic uncertainties and heightened geopolitical tensions are likely to persist, hindering any recovery.

Hong Kong Exchanges and Clearing (HKEX), the operator of the city’s stock exchange, reported a 3 percent year-on-year drop in net profit for the first half on weak trading and a sluggish initial public offerings’ market.

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Despite a pickup in market performance and turnover in the second quarter, the rally fizzled out as its bread-and-butter trading volume almost halved, alongside a dearth of new listings.

Once the prime choice for the world to take part in China’s stellar growth, HKEX has been wrestling with a bruising stock slump and moribund new offerings in recent years as factors, including the country’s economic malaise and global monetary tightening, took a toll on the city’s equity market.

To reboot market performance, Hong Kong’s exchange has been active on multiple fronts — from luring pre-commercial high-tech firms and reducing stamp duty on stock trading to diversifying the instruments that allow Chinese mainland investors to buy via a cross-border trading mechanism called Connect.

“However, it is premature to conclude whether these measures can significantly enhance the competitiveness of the HKEX,” said Kenny Wen, head of investment strategy at KGI Asia.  

The benchmark Hang Seng Index has lost more than 40 percent of its value since peaking in 2021. “While Hong Kong stock market trading activities strengthened in the second quarter, the overall market momentum has recently turned weaker,” said Wen.

For the IPO market, issuers currently consider the timing to be unsuitable given market conditions and have put their IPO plans on hold, he added.

According to HKEX, it had 30 new offerings that raised HK$13.4 billion ($1.72 billion) in the first half of 2024. That was down around 25 percent from total funds raised in new listings in the same period last year. Chinese e-commerce giant Alibaba earlier this year ditched its plan to list its cloud and logistics units partly because of a poor market environment.

The bourse operator in 2023 lowered its listing threshold for advanced technology firms, including those in semiconductors and artificial intelligence, under a new regime known as Chapter 18C. So far, only two companies have listed this way, with divergent post-listing performances. Shares of AI drug researcher QuantumPharm, which went public in June as the first 18C company, have risen over 14 percent.

In contrast, the second 18C company, automotive chipmaker Black Sesame’s shares closed more than 26 percent lower on its first trading day. With its IPO priced at the lower end of the range and achieving merely 1.52 times oversubscription, it suggests the market remains conservative in the outlook of such companies, said Wen, adding the effectiveness of the HKEX’s other measures “require further observation”.

Not every shot turns into a rout. It’s reminiscent of the wave of homecoming listings, spearheaded by US-listed mainland firms like Alibaba, after the bourse’s listing rule changes in 2018 that allowed listings with weighted voting rights — a share structure widely adopted by new-economy companies to raise capital without their founders losing control. But the market environment today is vastly different.

Double whammy

Markets are anxiously awaiting the telling argument that China has kickstarted its growth engine as investor confidence stems from listed companies’ earnings outlook. Currently, Chinese mainland firms account for nearly 80 percent of the market’s total valuation.

However, Jason Chan, a senior investment strategist at East Asia Securities, said the country’s macroeconomic data released recently has shown a “mixed” recovery path, rather than a much-needed “marked improvement”.

China set a full-year GDP growth target of around 5 percent for 2024. In the second quarter, its economy grew at a slower-than-expected 4.7 percent year-on-year.

Retail sales in July grew faster than a month earlier, but industrial output and fixed asset investment slowed. Also, the embattled property sector is still in the doldrums with home prices falling.

What is more, economists and analysts said potentially escalating geopolitical tensions could become a major drag on the city’s battered equity market given the two US presidential candidates’ tough tone on China issues.

From a macro perspective, the likelihood of an improvement in US-China relations has always been slim, said Gary Ng, a senior economist at French investment bank Natixis.

“For Hong Kong, continuing to serve as a financial center between the two superpowers makes it difficult for asset prices to completely shake off previous investment constraints or concerns that investors may harbor regarding tariffs or other geopolitical tensions,” he said.  

Previously, many Chinese tech firms, including Hong Kong-listed SenseTime, were included in a US investment blacklist as part of broad-ranging sanctions imposed to restrict the world’s second-largest economy’s progress in innovation.

Take time

On a positive note, some experts believe that there are underlying factors underpinning the growth. Chinese securities regulators in April said they would support Hong Kong’s financial markets by encouraging leading companies from the mainland to list in Hong Kong and further developing the cross-border Connect mechanism.

Although concrete steps remain unclear, EY’s Asia-Pacific IPO chief Ringo Choi said there’s a “tacit approval” for mainland firms’ overseas public offerings in regulatory efforts to help the private sector with financing problems. HKEX said its IPO pipeline had 107 active applications as of June.

“Listing activities are far from their boom time, but it’s a good sign that we do see more companies have shown growing appetite in offshore fundraising and been greenlighted recently,” Choi said.

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Kenny Ng, securities strategist at Everbright Securities International, also takes an optimistic view, saying the HKEX’s reform makes sense but it will take time for the benefits to be apparent.

Take the decade-old Connect mechanism for cross-boundary investment as an example — according to the city’s index compiler Hang Seng Indexes company, southbound trading via Stock Connect contributed to 14.3 percent of the market turnover last year, up 2.6 percentage points year-on-year.

Additionally, Hong Kong stocks look cheap after years of bruising sell-offs, said Kenny Ng. Large companies such as video game giant Tencent have stepped up their buyback programs, which could support stock prices. “Given relatively low trading activities now, there should be more room for a rebound when compared to downside risks,” he said.

Contact the writer at evanliu@chinadailyhk.com