The Hong Kong Stock Exchange Explained
In the last few years, the Hong Kong Stock Exchange (HKSE) has grown to become a household name in much of the world, considered the premier location for corporate issuers in the Asian time zone. Indeed, the HKSE is the third largest in the region, topped only by the Tokyo Stock Exchange and the Shanghai Stock Exchange by market capitalization. And it continues to be one of the fastest-growing exchanges in the region, with over 2,100 listed companies in 2020, and boasting the #1 location for IPOs in 7 of the last 12 years.
A record 46 companies listed in Hong Kong in the first half of 2021, with over US$27 billion raised.
The HKSE – often also called the Stock Exchange of Hong Kong (SEHK) – has gained in popularity and mainstream foreign acceptance thanks to recent listings like JD.com (HKEX: 9618), Alibaba Group (HKEX: 9988), and BeiGene (HKEX: 6160) all increasing awareness of the Chinese markets and investor opportunities. Dual-listings on the NYSE and LSE for some HK-listed securities has increased American and European awareness too.
This discourse highlights the Hong Kong Stock Exchange (HKSE) in a nutshell, with an explanation of how the stock exchange works and some comparisons to other markets globally, including U.S. exchanges.
The History of the HKSE
HKSE operates markets for securities and derivatives as well as providing clearing houses for these markets.
The HKSE has its origins in the 1890s as the Association of Stockbrokers in Hong Kong. Half a century later, Hong Kong had four true exchanges in operation, and an effort was made to unite these exchanges under a single banner: the Far East Exchange, Kam Nggan Stock Exchange, and Kowloon Stock Exchange all merged into the HKSE in the ‘70s. These merged with the Hong Kong Futures Exchange and the Hong Kong Securities Clearing Company in 2000 to form the most prominent issuers’ regulator both in Mainland China and Hong Kong, the Hong Kong Exchanges and Clearing Limited (HKEx), the owner of the HKSE. HKEX also owns the London Metal Exchange (LME) and the commodities focused Qianhai Mercantile Exchange (QME). The Hang Seng Index (HSI) is the widely accepted benchmark for the stock exchange of Hong Kong.
In 2014, the group launched Hong Kong Connect, a channel that allows mainland Chinese and Hong Kong investors to participate in cross-border investments. It allows Hong Kong and foreign investors to trade eligible stocks listed on the Shanghai Stock Exchange (northbound) and permits mainland institutional and individual investors to trade Hong Kong-listed eligible stocks (southbound).
Remember, it’s only been thirty years (1997) since the British hand-off of Hong Kong, which remains a uniquely positioned Chinese “special administrative region” free to pursue capitalism and its own currency.
Back in 2019, the HKEx made a $37 billion cash and stock bid to acquire and merge with the London Stock Exchange. That deal never went through, but it would have created the third largest exchange operator in the world and been the biggest foreign takeover of a UK company ever.
Like many other major exchange operators globally, HKSE’s owner HKEx is itself publicly traded on the exchange (HKEX: 388).
How The HKSE Works
The stock exchange of Hong Kong works much like most other exchanges around the world, with some unique features.
Why are HKSE listings in numbers?
The first major difference that European and American investors will notice is the exchange’s use of numbers compared to letters in stock symbols.
Chinese is not an alphabetic language, and thus it does not lend itself to the traditional ABCDs of other exchanges around the world. Representative numbers are an easy solution, and because they’re nearly universally used, investors globally can understand HKSE symbols.
A full list of HKSE-listed securities can be found here.
How do you list on the Hong Kong Exchange?
The HKSE has some steeper requirements to list a company compared to other exchanges globally.
First, any new applicant or company intending to list on the HKSE main board is expected to generate a minimum positive cash flow of HK$20 million (US$2.6 million) from operating activities for the first two fiscal years following the listing. Currently, the issuer’s public float minimum value is HK$125 million (US$16 million) and the company must have a market capitalization of HK$500 million (US$64 million). The establishment of these minimum values is meant to enhance the listed equities’ volatility, improve the quality of listings, and provide for robust trading liquidity.
Biotechnology companies, which traditionally may not meet these requirements due to being developmental by nature, with no revenue, can meet a different set of listing requirements for the Hong Kong Stock Exchange.
Who can trade on the Hong Kong Stock exchange is a little limited too. In mainland China, only investors with RMB 500,000 in their investment and cash accounts can trade securities.
What Is HKEx and Who Regulates It?
As with many things in China, the merger between corporate and public is apparent. The HKSE is owned by Hong Kong Exchanges and Clearing Limited (HKEx), and uniquely, the Hong Kong government is the single largest shareholder in HKEX, with the right to appoint six of thirteen directors to the board.
Beyond its exchanges, HKEx operates four clearing houses in Hong Kong, which are responsible for settling and finalizing securities exchanges:
- Hong Kong Securities Clearing Company Limited (HKSCC)
- HKFE Clearing Corporation Limited (HKCC)
- the SEHK Options Clearing House Limited (SEOCH)
- OTC Clearing Hong Kong Limited (OTC Clear).
These each provide integrated clearing, depository, settlement, and nominating activities to their participants, while the last also provides interest rate derivatives.
HKEX provides market data through a specific data dissemination entity, HKEX Information Services Limited.
HKSE is regulated by the Securities and Futures Commission (SFC), which originated in Hong Kong in 1989 to protect investors in the stock market and to implement relevant legislation on financial products and securities.
Similar to the U.S. Securities and Exchange Commission (SEC) or the U.K.’s Financial Conduct Authority (FCA), the commission is mainly responsible for defining the transparency requirements, responsibilities, functions, and powers of the many players in the Hong Kong securities industry. It consists of four major operational divisions: corporate finance, enforcement, supervision of market, and intermediaries and investment products.
HKSE Differences from U.S. Markets
In the United States, the major stock exchanges are the Nasdaq and the New York Stock Exchange. Widely considered the premier listing locations in the world, there are some key differences when comparing the NYSE, Nasdaq, and HKSE.
Just like the HKSE, these U.S. exchanges have minimum capital requirements, require audited earnings, and regular financial reports. The Nasdaq is historically tech-focused, but both exchanges attract startups intending to launch their initial public offering (IPO) and blue-chip companies with deep industry experience.
One major difference between U.S. and Chinese public markets is the use of equity financing in U.S. markets to fund operations and growth compared to debt financing in China. Estimates are that only 5% of corporate financing in China comes from equity, compared to over 50% in the U.S.
Another difference between the HKSE and NYSE is their history of operations. The latter was established much earlier than HKSE; the NYSE was launched in 1790, while the early predecessors to the HKSE were established around a hundred years later.
These two stock markets also differ in terms of their respective minimum value for a company to be listed. While the HKSE requires a minimum market capitalization of US$64 million for an initial listing, the NYSE requires instead a minimum shareholder’s equity value of US$4 million prior to listing.
Further, the HKSE differs from the NYSE in terms of their unique ways of identifying companies. While the HKSE deploys numbers (for instance, the Bank of East Asia Limited is listed as SEHK: 23) NYSE and Nasdaq symbols consist of one to four or five letters for local and foreign companies, respectively.
Differences with Other Markets: Saudi Stock Exchange
As one of the member countries of the Organization of Petroleum Exporting Countries (OPEC), Saudi Arabia plays a critical role in shaping oil- and commodity-sensitive markets. The country’s principal stock exchange is the Tadawul, which serves as the sole stock exchange as well as the leading market within the Gulf Cooperation Council (GCC, including Bahrain, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates).
Tadawul is owned completely buy the Saudi Public Investment Fund. It received substantial press in 2019 with the public listing of Saudi Aramco, officially the Saudi Arabian Oil Company, as the world’s largest IPO ever.
Unlike the HKSE, Tadawul was formed very recently, in 2007, though trading began less formally as early as the 1950’s. It remains an emerging exchange compared to the HKSE, and is the ninth largest exchange globally. Uniquely, the Tadawul is open from 10:00AM to 3:00PM Sunday through Thursday. Compare that to the HKSE’s Monday through Friday 9:30AM to 12:00PM morning session and 1:00PM to 4:00PM afternoon session.
The American exchanges open 9:30AM through 4:00PM Monday through Friday.
Get a Stock Loan on the Hong Kong Exchange
Stock market participation globally is at an all-time high thanks to the simplicity of online and discount brokerage platforms, and in many countries equity participation is the leading form of retirement saving. Still, HKSE participation is much lower than in the U.S. and Europe, and the marriage of public- and private-sector ownership in China can be confusing.
At GetAStockLoan.com, we specialize in helping large position-holders access liquidity no matter the market. Non-recourse stock loans on the Hong Kong Stock Exchange can be closed in days, and our partners are able to manage positions and execute loans beginning at US$5 million, even in hard-to-trade securities.