China authorities issue plans for dual-class shares in stock connect

alibaba headquarters in Hangzhou, China. Alibaba is said to be readying a Hong Kong listing under the new regulations, which could raise as much as $20bn.

Chinese authorities proposed rule changes that would for the first time allow local investors to buy shares of some popular technology companies listed in Hong Kong – including, potentially, Alibaba Group Holding Ltd. The country’s stock exchanges on Friday published draft regulations that would bring stocks with different classes of voting rights into the trading links between the mainland and the former British colony, giving onshore traders access to some of China’s hottest startups. Xiaomi Corp and Meituan Dianping went public in Hong Kong last year, the first major tech firms to use new rules permitting weighted-voting rights, also known as dual-class shares, on the city’s bourse. Alibaba, which uses the structure and is listed in New York, is said to be readying a Hong Kong listing under the new regulations, which could raise as much as $20bn.

China’s authorities have been trying to find ways to keep the country’s tech companies at home, and last year worked on plans for depositary receipts, which were designed to let dual-class shares, not permitted on its major exchanges, trade onshore.  A new trading venue, the Star market, allows the structure, though only smaller companies have so far gone public. Hong Kong Exchanges & Clearing Ltd’s years-long push for weighted-voting rights, which are often used by tech founders to keep control of their companies even after going public, was in part premised on China-based technology firms choosing Hong Kong over the US because Chinese onshore investors would easily be able to invest via the stock connect.  But mainland authorities said in July 2018 that dual-class shares wouldn’t be allowed in the system, a decision that caused Xiaomi’s shares to slump.

In December, the Shanghai, Shenzhen and Hong Kong exchanges said they had agreed on a “detailed arrangement” for including shares with unequal voting rights into the connect, without providing more details. The new rules were expected to begin in mid-2019, the bourses said at the time. A change would likely boost HKEX, which stands to benefit from increased trading volume.  The bourse operator currently generates about 5% of its revenue from the links with stock exchanges in Shanghai and Shenzhen.
Under Friday’s draft proposal, companies would need to meet the following criteria to be included in the stock connect:

* Average daily market value of at least HK$20bn ($2.56bn) for just over six months.
* At least HK$6bn in total transaction value for just over six months.
* Be listed in Hong Kong for at least six months and 20 trading days.
* The public comment period for the plans ends on August 9.

Sources and photo-credits: Gulf Times, Bloomberg