Why volatility can be good for stock exchange
Hong Kong’s listing market looks more Chinese every day. China Literature, the online publishing arm of mainland tech colossus Tencent, smashed the chandeliers in its $1.1 billion Hong Kong debut, soaring more than 80 per cent in early trade on Wednesday. As local punters swarm into mainland tech, the new-issue market is starting to mimic distortions more common in Shanghai and Shenzhen. For the bourse operator, Hong Kong Exchanges and Clearing, it’s a good problem to have. The special administrative region had struggled for years to attract sexier companies to its bourse, dominated by staid blue-chips from finance and real estate. It also had a problem with IPO performance, with overpriced deals helped over the line by friendly “cornerstone” investors.
The recent run of successful tech listings, including online insurer Zhong An, selfie-app maker Meitu, and now China Literature, suggests such problems are being put behind - in exchange for new headaches. As Hong Kong opens up its bourse to investors from the People’s Republic, the exchange has started to show hints of mainland trading behaviour, with the volatility that entails. China Literature’s big debut was thanks largely to retail enthusiasm. Local speculators bid for 625 times the shares on offer, tying up $67 billion in the process. In China, where individual investors dominate transactions, big first-day pops are routine. IPOS are usually thousands of times oversubscribed and they used to tie up so much cash they pushed up short-term interest rates, before regulators tweaked the rules. That is because so much value is transferred to new investors. Every Chinese company that wants its IPO approved prices at 23 times price-to-earnings, the semi-official guidance rate, which effectively bakes in a big first-day pop. In the case of China Literature, Wednesday’s explosive rise suggests bankers may have left around $1 billion on the table.
Advisers may have sincerely underestimated demand for a company that makes money hosting amateur fiction about kung fu, time travel, and the “Nine Netherworld Bird”. Alternatively, enthusiasm may wear off quickly. Either way, volatility is good for a stock exchange, and as HKEX tries to reposition itself, a big launch for a mainland startup is something to celebrate.
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