SH-HK exchange link opens new listing options

Connect program could see promising firms trade closer to home

The newly launched link between the Hong Kong and Shanghai stock markets should breathe new life and stability into China's volatile stock markets by making shares of mainland-listed firms accessible to sophisticated Western buyers with billions of dollars to invest. But equally exciting is a bumper crop of new investment opportunities that will soon become available to Chinese mainland investors, who will finally gain access to a wide range of top domestic high-tech firms that for years were beyond their reach.

Some of their country's most famous tech and telecoms names like Tencent, Lenovo and China Mobile are all listed in Hong Kong, meaning they could soon become available to mainland-based investors under the new scheme.

The link may also prompt some of China's fastest-growing high-tech firms, many of which prefer to list in New York, to now consider Hong Kong IPOs instead to make their shares available to both global and domestic investors. Finally, many of the country's biggest tech names that are now listed in New York, such as Alibaba and Baidu, might also consider new dual listings in Hong Kong for similar reasons.

Regulators in Hong Kong and on the mainland should take steps to encourage companies to strongly consider such options, which would boost both Hong Kong and Shanghai as leading global stock exchanges. Such a move would also allow mainland investors to finally profit from the huge success and big growth potential of some of their nation's most prominent private companies.

The new stock connect program was first announced in April, and formally launched Monday after extensive testing. The link allows investors on the mainland to buy Hong Kong-listed shares and vice versa, effectively pooling the two exchanges to make one of the world's largest stock markets.

Initial trading will be limited to a small number of the most widely traded stocks in each market. But the number will gradually grow over time until most or all Hong Kong-listed stocks become available to mainland-based buyers, and mainland-listed shares become available to Hong Kong-based investors.

Most of the world's top brokerages and other major institutional investors currently have offices in Hong Kong, whose stock market is far more open to international buyers than China's tightly controlled onshore markets. Thus those global investors will now have access to mainland-listed shares.

At the same time, the link will finally make shares of many top mainland tech companies available to investors in their home market. The most notable names in that category include all three of the mainland's mobile carriers, as well as leading PC maker Lenovo and top Internet company Tencent.

All of these companies chose Hong Kong for their listings a decade or more ago, since such listings made their shares available to a far larger pool of investment dollars than they would have found at home. But to facilitate those listings, those companies set up a corporate structure that now prevents them from listing in their home market.

In addition to these existing Hong Kong-listed names, a new generation of Chinese high-tech firms could soon become available to mainland investors if more companies now opt for Hong Kong IPOs over a traditional bias for US markets. Many of China's most prominent high-tech names, led by Internet leaders Alibaba and Baidu, are now listed in New York, which has a long history of hosting such IPOs and has developed a dedicated group of investors that follow the group.

That historical bias has been slow to change, but could get some new impetus if the new connect program proves successful.

A successful connection could even prompt existing New York-listed companies like Alibaba and Baidu to consider secondary listings in Hong Kong. Nearly all of the New York-listed firms have share structures that would allow for such secondary listings, and big State-run names like China Mobile already have such dual listings. Some Chinese Internet firms even talked about such secondary listings in Hong Kong about a decade ago, though none ever went through with the plan.

Investors are understandably excited about the new connect program, even though many questions around issues such as taxes and listing qualifications are likely to crop up in the months ahead. Regulators in Hong Kong and Shanghai should move quickly to answer those questions and roll out policies that smooth the transition, creating an environment that could quickly make many of China's best-known high-growth firms finally available to mainland investors.