By Joanne Chiu
Hong Kong is becoming an active center for trading stock in some of China's largest technology groups, bolstering the case for more secondary listings of U.S.-listed Chinese companies.
The city now accounts for nearly a fifth of the shares changing hands by value in Alibaba Group Holding Ltd., after the e-commerce giant's Hong Kong listing in November, FactSet data show.
Since NetEase Inc. and JD.com Inc. made their debuts in Hong Kong last month, their Hong Kong shares have accounted for about 33% and 21%, respectively, of total turnover by value, according to FactSet. The proportions for NetEase and JD.com could decline over time given that trading volumes tend to spike when a new company comes to market. All three companies already had American depositary receipts in New York.
The solid turnover signifies keen interest from individuals and institutions alike, which could make it more appealing for other companies to follow suit. It also means extra business for Hong Kong Exchanges & Clearing Ltd. and the city's brokerages. In May, Alibaba was the second most heavily traded stock in Hong Kong after Tencent, according to the city's stock exchange.
The secondary listings so far, and a likely wave of further deals, have helped bolster confidence in Hong Kong's future as a capital-raising center, at least for Chinese companies. That comes even as Beijing's imposition of a tough new security law has raised broader concerns for international business in the city.
Stephane Loiseau, head of prime sales and execution for Asia Pacific at Société Générale, said the listings had created new liquidity, rather than just cannibalizing U.S. trading volumes.
He said trading volumes could rise further if stocks join key indexes, and if mainland Chinese investors are allowed to trade them through Hong Kong's Stock Connect program.
Mr. Loiseau said activity in related derivatives, such as Alibaba warrants, reflected healthy appetite from individual investors and had helped increase trading in Alibaba shares. "Retail investors feel that they have strong views on this stock," he said.
Zafar Aziz, head of strategic sales and depositary receipt investor-relations advisory at Deutsche Bank, said secondary listings boosted overall liquidity for companies with depositary receipts, making it easier to trade sizable positions with less risk of market impact.
He said, however, that U.S. listings remained important for brand-building, incentivizing staff, creating an acquisition currency and raising follow-on funds.
The prospect of potential U.S. delistings, plus a 2018 loosening of Hong Kong's listing rules, has helped spur the share offerings. Mohammed Apabhai, head of Asia-Pacific trading strategy at Citigroup, said for U.S.-listed Chinese companies, mounting political risks in the U.S. were "a very significant push factor" toward Hong Kong offerings.
Some 22.4% of Alibaba's shares are now held in Hong Kong, disclosures show. A majority is held by Citigroup Inc.'s Citibank unit, which manages Alibaba's depositary receipt program, suggesting much or all of this position corresponds to holdings of major shareholders, rather than freely tradable stock.
Over time, many major institutional investors are likely to build holdings in both markets. They might do this by buying Hong Kong stock in an initial offering or in the secondary market, rather than handing back their existing U.S. holdings.
"What you'll see is the big international investors having holdings in both ADRs and Hong Kong shares," said Mr. Aziz at Deutsche Bank.
Capital Research and UBS Asset Management are among investors that hold both kinds of Alibaba shares through one or more units, FactSet data show.
Overall, though, most investors holding depositary receipts haven't swapped them for Hong Kong ones. Many investors contacted by The Wall Street Journal said they retained their U.S. securities, since any eventual delistings could be years away, and Hong Kong shares incur higher trading costs.
Others plan to trade in both markets, hoping to capture potential headline-driven trading opportunities given that the two sets of securities are interchangeable. A few Asia-based investors have moved their holdings to Hong Kong for easier trading hours.
"Most people in the market still think that delisting is a long way away, " said Mr. Apabhai at Citi. "Unless they're required to do something, the default is to do nothing." He said investors were watching for arbitrage opportunities but these were limited.
Alibaba's depositary receipts have risen nearly 12% this year, while JD.com's and NetEase's equivalent securities have surged nearly 75% and 45%, respectively.
Write to Joanne Chiu at email@example.com