Hong Kong Bull Rush; the Enclave Is Winning the Race with Shanghai to Become the De Facto National Stock Market of China

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Byline: George Wehrfritz

Investors eager for a piece of China have traditionally had to buy the whole hog. Yet as China Yurun Food Group illustrated last week, it is now possible to grab a thin slice. The mainland's third largest meat processor raised about $190 million in its debut on Hong Kong's main stock index, giving investors access to China's vast chilled pork market for about 50 cents a share. Up next: China's largest watch distributor, a major circuit-board maker, Guangdong's public highway operator, a Beijing auto works and several state-owned Chinese banks all plan to list shares in Hong Kong in the coming months as IPO fever sweeps the city.

The gold rush runs counter to the CW that Shanghai is preordained to rise as a financial hub to rival Tokyo, London or New York. Instead, Hong Kong's main Stock Exchange is emerging as China's de facto national market. In 2004 Hong Kong generated three quarters of all new China listings by value, and the nine largest IPOs, according to PricewaterhouseCoopers. With more IPOs still in the pipeline, including a whopping China Construction Bank listing expected to raise $6.5 billion, the largest ever in Hong Kong, 2005 is forecast to be a record-breaking year. "No question Hong Kong has the advantage over Shanghai," says Hang Seng Bank chief economist Vincent Kwan. "From an economic perspective, it's still one country, two systems."

The listing bonanza is welcome news in a city that is slowly losing its edge in sectors like shipping and logistics to low-priced rivals across the border. And with Chinese regulators just beginning to make the sweeping reforms necessary to fix dysfunctional stock markets in Shanghai and Shenzhen, Hong Kong's dominance isn't set to wane any time soon. Yet as Hong Kong's market composition shifts from homegrown shipping companies and property developers to a mix dominated by Chinese state enterprises, some analysts worry that standards have fallen. "There has been a tendency for rulemakers to lower the bar," says shareholder-rights activist David Webb, one of the Hong Kong Exchange's six independent directors. "Ultimately, that undermines quality and jeopardizes our future as a market."

Beijing hopes that Hong Kong listings will improve the governance of its biggest companies. The government now encourages state enterprises to sell shares abroad, as an immersion course in global standards of transparency and accounting. …