Why volatil­ity can be good for stock ex­change

Business Daily (Kenya) - - EDITORIAL & OPINION - PETE SWEENEY is a Reuters Break­ingviews colum­nist

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.

The ed­i­tor wel­comes brief let­ters on top­i­cal is­sues. Opin­ions ex­pressed here are not nec­es­sar­ily those of the ed­i­tor or pub­lisher. They may be edited for clar­ity, space or le­gal con­sid­er­a­tions. Send via e-mail to bd­feed­back2@ke.na­tion­media.com

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