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Democratic deficit

22 June 2015 By Peter Thal Larsen

Democracy has had a bad few days in Hong Kong. First the former British colony shelved its pledge to grant citizens universal suffrage. Now the Hong Kong stock exchange is getting ready to ditch its long-held principle that shares should carry equal votes.

Exchange officials hope the shift, inspired by the loss of Chinese e-commerce company Alibaba’s giant initial public offering to New York last year, will attract more fast-growing companies. Many large fund managers are sceptical: BlackRock, Fidelity and Aberdeen Asset Management all rejected any change to the status quo. The bourse’s compromise is to make only a small number of companies eligible. Those wishing to give some investors extra votes, following in the footsteps of Google and Facebook, will have to be listing for the first time and be worth billions of U.S. dollars; they will also have to accept stricter board oversight.

The effect is a bit like raising the speed limit on motorways, but only applying the change to large, new cars fitted with extra airbags. In any case, American exchanges that allow multiple classes of shares may no longer be the main competitive threat. More than a dozen U.S.-listed Chinese companies have announced plans to take themselves private so far this year, presumably with the intention of re-listing at home. Hong Kong’s true competitors may be exchanges in Shanghai and Shenzhen, where the listing process is still more cumbersome.

Alibaba’s unusual structure, whereby a handful of executives decide on board appointments, would have disqualified it from a Hong Kong IPO even under the new rules. But the exchange is also planning to drop rules that prevent Chinese companies from obtaining secondary listings. That would allow a company listed in another location to issue shares in Hong Kong even if, like Alibaba, it has quirks the city’s market doesn’t allow.

The willingness to bend established rules, apparently to promote the exchange’s commercial advantage, jeopardizes Hong Kong’s position. As China’s capital markets open up, the city’s reputation for transparency and predictability is increasingly valuable. An influx of cash from the less-transparent Chinese mainland, alongside with this proposal to weaken rights for shareholders, are bad omens.




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