HONG KONG: In the IPO boom that has swept through Asia this year, the Hong Kong Stock Exchange (HKEx) has emerged as the world's top producer of new, publicly traded companies.

In Shanghai, it was a different story - the local exchange produced a fraction of the public offerings seen by its near neighbor, just a 2-hour plane ride south.

But some investment bankers and industry experts in Hong Kong say it's only a matter of time before their stock exchange loses market share to Shanghai - should the mainland decide to relax capital controls.

"In the long run, there will be an impact on Hong Kong's international capital market position, as more firms will choose listings in Shanghai to tap the surging growth of the country," said Self Li, head of mutual fund sales in Asia at Baring Asset Management.

For now, the only publicly traded companies in Shanghai are mainland-based. But a list is growing of international names with their sights set on trading there, including HSBC.

In January-December, 47 IPOs in Hong Kong raised a total $22.8 billion, according to Thomson Reuters data. In the same period, Shanghai saw just six IPOs for a total of $13.8 billion.

Hong Kong's capital markets grip may soon be tested.

The Shanghai Stock Exchange plans to launch its international board next year and will aggressively pursue foreign issuers.

The city's vice mayor, Tu Guangshao, has told local media the international board will be part of a major effort to build Shanghai's exchange into one of the world's largest bourses.

If the size of HSBC's possible listing is any indication - the bank could raise 50 billion yuan ($7.3 billion) next year, according to a Reuters report in August - foreign listings might quickly propel Shanghai above other financial centres.

Even bankers based in Hong Kong and profiting from the deal flow believe the tide will change, as Beijing is expected to open its markets further over time.

"The CSRC wants to develop the local market gradually and consistently," said a Hong Kong-based equity capital markets banker, who did not want to be identified, referring to the China Securities Regulatory Commission, the securities regulator, "Over time, China's capital market will open up. It's inevitable," the banker said.

At the same time, Shanghai may benefit from another development - Beijing's push to have big State-owned enterprises list domestically first, and only later go to Hong Kong.

But Beijing's stance is changing amid domestic complaints that large Chinese IPOs should benefit mainland investors first. Hong Kong wasn't always on top, in any case.

From 2001 through 2003, Shanghai cranked out more IPOs and more proceeds. In 2004, Shanghai again outperformed Hong Kong in IPO volume.

But the market's perception of the China opportunity may outweigh the safety of listing in a place like Hong Kong.

"The inevitable opening of the Chinese market is good news for the overall market, in terms of competition and opportunity. That will be the next step when capital controls come off," said the equity capital markets banker, adding that then "Hong Kong will struggle to regain its regional leadership."

Reuters

(HK Edition 12/12/2009 page5)