Many Chinese companies took a listing at US exchanges because audits in Hong Kong and on mainland exchanges were stricter. The HK stock market now is watering down regulations for audits, notes Beida accounting professor Paul Gillis on his website to his shock, to pull back those Chinese companies from the US.
The Hong Kong Stock Exchange (HKSE) has issued its latest proposal to weaken corporate governance standards in order to attract Chinese listings that have gone to the US. The US has won most of the listings of China’s privately held companies, including bellwethers Alibaba, Baidu and Sina. There are several reasons for that, including the fact that the US permits weaker governance than Hong Kong or China, and that fees for investment bankers are considerably higher with US listings. The weaker governance rules led to the NYSE winning the Alibaba listing over the HKSE. Hong Kong faced the possibility it would not win another major IPO from China because most Chinese founders want a controlling vote, even when they no longer hold a majority of the shares.
Much to the consternation of corporate governance advocates, Hong Kong proposes allowing control structures (called weighted voting rights – WVR). Shareholder advocates in the US have opposed the proliferation of these structures in technology companies. Hong Kong is also proposing to relax other listing standards related to profitability.
The proposed rules essentially allow unicorns to list in Hong Kong with control structures. More flexible rules are proposed for biotech issuers.
In addition, the path is being cleared to allow overseas listed companies to seek secondary or main listings in Hong Kong after two years of compliance on a foreign exchange. Restrictions apply to prevent regulatory arbitrage, where a company lists overseas first in an attempt to circumvent tougher Hong Kong listing standards.
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