Hong Kong IPOs: Access China Unicorns with New Listing Rules (Chapter 18C)

Hong Kong’s Appeal for Fast-growth Tech Firms

Long one of the world’s preeminent financial centers, Hong Kong has in recent years overhauled requirements for listing on its stock exchange to sharpen its edge against global competition. The changes aim to increase Hong Kong’s appeal as a location for ambitious technology firms looking to raise funds in capital markets through an IPO.

The Hong Kong Stock Exchange (HKSE) can now accommodate businesses that would, under previous listing regimes, have been excluded—for instance, businesses with great potential but that have yet to generate revenue; firms with governance structures that allow founders to retain decision-making control as a listed entity; and those needing capital to support intense R&D activities as they build the industries of the future.

As the reforms open new paths for pioneering tech companies to raise capital in Hong Kong, they deliver a raft of benefits for investors and the companies listing. For international investors, particularly Middle East sovereign wealth funds and family offices, the changes offer exposure to Chinese unicorns and an alternative to the venture capital and private equity funds that are subject to investment and liquidity restrictions. China’s mammoth tech corporations benefit from being able to spin off as separate entities, early-stage businesses that are still developing, while accessing investment in an international venue.

The Enduring Appeal of China’s Economy

Despite economic headwinds and geopolitical risk, international investors remain keen on exposure to the Chinese economy, thanks to its many distinct strengths. The world’s second largest economy (measured by nominal GDP) and second most populous country, China still offers enormous potential for growth, even after almost five decades of rapid expansion. The nation’s Green Economy and Digital Economy programs, for instance, together added 4.7% to China’s growth rate in 2022 (more than offsetting the 3.7% contraction experienced in the real estate sector).

The nation’s middle class has been expanding for decades, and numbers are projected to continue rising. By 2030, Boston Consulting Group forecasts that 80 million more people will join China’s middle and upper classes, which as a group will account for 40% of its population—a considerable source of spending power and economic potential.

China’s world-class manufacturing capabilities—so advanced and concentrated that the ecosystem is almost impossible to replicate in other territories—accounts for 30% of global capacity. And the sector continues to increase investment in R&D, with a current economic value add of 10% and potential of up to 30%, which compares favorably to the ratios of leading international technology firms.

In regard to technology, China has proven time and again that it can deliver when it comes to world-leading innovation—as demonstrated in sectors including 5G telecom networks, high-speed trains, drones, lithium-ion batteries, electric vehicles and solar panels, with the country now making great strides in advanced semiconductors.

As geopolitical tensions drive a wedge between the world’s two richest countries, China sees opportunities in exporting advanced technologies to the Global South, as it leverages its strengths as an exporter to transform into a global innovation powerhouse.

Efficient capital markets, sufficient pools of capital and high levels of liquidity will be vital for China to realize this vision. And these are aspects in which Hong Kong, as a global financial center, excels. These inherent strengths have been further bolstered by an ongoing series of reforms in its capital markets.

April 2018—the First Series of Reforms

The raft of enhancements to Hong Kong’s listing requirements kicked off in April 2018 when HKSE introduced three significant changes to maintain the global appeal of the city as a venue for IPOs.

Chapter 8A for the first time permitted innovative companies to list in Hong Kong with weighted voting rights (WVR) governance structures. Long commonplace in Silicon Valley—with businesses such as Facebook, Alphabet (Google’s parent company) and Snap deploying the structure—WVR enables tech founders to maintain executive control of a firm beyond the IPO with a minority of shares.

Introduced at the same time, Chapter 18A allowed pre-revenue firms to list in Hong Kong, albeit only in the biotech sector at that point in time, while Chapter 19C provided a streamlined route for firms to organize a secondary listing in Hong Kong, if they already had a primary listing on another major international exchange. For multinational corporations, this meant they could create a ring-fenced Chinese entity focused on the domestic market while complying with strict controls on the movement of capital in and out of the country.

Since this initial raft of refinements, work on fine-tuning Hong Kong’s capital markets has continued. In January 2022, HKSE introduced Chapter 18B to allow the creation of special purpose acquisition vehicles.

The range of complementary measures had the desired effect: Since 2018, 260 new economy companies had listed in Hong Kong and raised USD 118 billion as of March 2023.

Introducing Chapter 18C—wider Eligibility Criteria for High-potential Tech Firms

The latest significant shift has been the introduction of Chapter 18C, which took effect in March 2023. Chapter 18C set out to widen the eligibility criteria for Hong Kong listings in order to welcome specialist, high-potential technology companies. Although the framework has been in place for more than a year, it’s unclear whether international investors fully appreciate its considerable benefits.

Chapter 18C applies to companies primarily engaged in R&D and commercialization activities in five specific hi-tech sectors: next-generation IT, advanced hardware and software, advanced materials, energy and environmental tech, food and agricultural technologies. Fostering an environment that supports innovation and experimentation, Chapter 18C prioritizes R&D investment and achievements in advanced technologies above traditional financial metrics.

It also expands the range of sectors beyond biotech from which pre-revenue businesses can apply to list in Hong Kong. Pre-revenue businesses looking to capitalize on the regulation and list in Hong Kong will need a minimum market valuation of HKD 10 billion (USD 1.3 billion); while commercial businesses have minimum thresholds of an HKD 6 billion (USD 0.8 billion) market capitalization and revenue of at least HKD 250 million (USD 32 million) in the most recent financial year.

Connecting International Investors With Chinese Unicorns

For international investors, Chapter 18C offers unique opportunities to capitalize on China’s market potential and technological prowess. The proposition is particularly compelling for Middle East and Asia Pacific sovereign wealth funds along with family offices—with all groups seeking exposure to Chinese technology in diversified portfolios.

Hong Kong has been a prime investment venue for Asia Pacific’s sovereign wealth funds for some time. But geopolitical tensions across the world are encouraging investment communities to seek a wider range of partnerships and opportunities.

Recent years have seen closer relations between the economies of the Middle East and Hong Kong. Middle East sovereign wealth funds have become increasingly active in Hong Kong’s stock market, recognizing value and potential as Western investors have reduced their exposure. Sovereign wealth funds from Saudi Arabia, Abu Dhabi and Qatar have all taken part as seed investors in the listings of Chinese firms. In July this year, HKSE added the Abu Dhabi Securities Exchange and the Dubai Financial Market as recognized stock exchanges, opening the path for companies listed on those exchanges to apply for secondary listings in Hong Kong. This follows the addition of the Saudi Exchange in 2023.

In addition to new international connections, a drive to strengthen Hong Kong’s position as a regional hub for family offices has started to yield some impressive results. More than 2,700 of them are now based in the city.

As HKSE burnishes its international appeal, China’s would-be unicorns also stand to gain. When it comes to raising funds to drive growth, listing in Hong Kong not only provides capital and liquidity, it also marks the entry of a business onto the international stage and grants the kudos that goes with that.

The Stock Connect program, which binds together the Hong Kong, Shanghai and Shenzhen exchanges, opens the path for ambitious tech IPOs to reach Chinese retail investors and access even more liquidity and capital. Meanwhile, companies and investors holding their reserves in Hong Kong enjoy the largest offshore RMB deposit center, with higher returns than onshore.

The revamped HKSE listing regimes provide China’s unicorns with a platform for overseas expansion fueled by capital raised offshore, while fostering links with foreign cornerstone investors. These opportunities are not limited to China’s unicorns, of course. The modernization of HKSE’s listings requirements is also attractive to the many startups and unicorns across Southeast Asia seeking successful tech IPOs.

Investing on HKSE, international financiers benefit from a blend of capabilities and safeguards that are otherwise rare in Asia Pacific. Hong Kong’s Common Law legal framework provides a solid foundation for investment, financing, and wealth management activities. Thanks to its comprehensive commercial and property laws, Hong Kong remains a significant regional hub for international mediation and arbitration.

The world’s great financial centers do not exist in isolation but draw on a wider ecosystem that harnesses the efforts of public and private sector organizations and an abundant supply of talented scientists, engineers, and knowledge workers. Here too, Hong Kong is well placed as the hub of a vibrant economic cluster that further strengthens its appeal for tech IPOs. Five of its universities rank within the world’s top 100, facilitating groundbreaking research and talent development. The city’s proximity to Shenzhen, China’s hotbed of innovation and home to renowned global brands, such as Huawei, Tencent, and BYD, provides additional advantages. Moreover, its location within the Greater Bay Area, with a population larger than Germany’s and a GDP comparable to South Korea’s, offers access to immense economic potential.

Hong Kong’s unique historical attributes, ongoing strengths as a venue for capital markets, and supportive ecosystem make it an ideal location for international investors seeking to capitalize on the growth potential of Chinese unicorns and the broader technology sector. The recent reforms, particularly Chapter 18C, further solidify Hong Kong’s position as a premier destination for IPOs, offering a gateway to tap into China’s technological power and promise.