HONG KONG/BEIJING -- Once viewed as a haven with access to foreign capital and marketplace discipline, Hong Kong's stock exchange is seeing a growing number of China's hulking state-owned companies delist units there so they can focus on taking leading roles on the mainland.
The trend is only expected to grow this year, with some observers pointing to efforts by the Chinese government to strengthen its industrial base -- a plan envisioned by President Xi Jinping -- in its rivalry with the U.S.
China's state-owned companies once flocked to the Hong Kong exchange to gain access to foreign capital and connect with the global economy. While the bourse will likely continue to draw new listings, many issues have suffered a long-term slump in sales. Mainland authorities restrict companies from issuing shares at a lower price than what their assets are worth, meaning they cannot raise new funds when their stocks fall too low. A listing also comes with additional costs for audits and disclosures.
Four of these enterprises have delisted from the Hong Kong Stock Exchange this year, as companies give up on raising money in a sluggish stock market and instead retrain their attention to strengthening core operations back on the mainland.
Listed in 2007, China Agri-Industries Holdings was taken private in March, supported by investment bank China International Capital, which said the move would allow the company to integrate and streamline operations with parent China Foods. "It is a chance to reevaluate governance and shareholding structures, and to reduce costs associated with maintaining a stock listing," the bank said.
Wind-power producer Huaneng Renewables became the largest state-owned company to delist in Hong Kong in February, according to mainland reports. The move was proposed by its parent, China Huaneng Group, as sluggish stock prices made it harder for the company to raise money through the market. The group is likely looking to restructure as well.
Business conglomerate Dah Chong Hong Holdings and aerospace concern AVIC International Holding have also delisted this year.
And more are expected to follow suit. China Merchants Group unit China Merchants Port Holdings saw its stock price spike after it was reported Tuesday to be considering delisting. The company has garnered attention for its part in Beijing's Belt and Road infrastructure-building initiative, like acquiring ports overseas.
The trend appears to be fueled by the government's push to bolster China's industrial base. Xi views state-owned companies as a tool for raising China's national might and wants them to boost their competitiveness, especially given the growing trade and technology rivalry with the U.S. Delisting Hong Kong units gives the groups more flexibility to restructure.
"State-owned companies are a pillar for China's economic and societal development," said Hao Peng in April 2019, shortly before becoming chairman of the State-owned Assets Supervision and Administration Commission, which oversees state-run businesses. "We will continue to foster globally competitive companies."
True to his word, Hao the following October brokered a merger between China Shipbuilding Industry and China State Shipbuilding, the country's two biggest shipbuilders. In November, top steelmaker China Baowu Steel also agreed to take a 15% stake in sixth-ranked Shougang Group. In addition, 44 privately run, publicly traded companies were brought under state ownership in 2019.
The government's focus on state-owned companies has only increased as the coronavirus squeezes the economy. "State-owned enterprises will be the main force behind reopening businesses," Xi said last month.
Eight companies (including private companies) have finalized plans to delist in Hong Kong in the January-March quarter, according to U.S. research company Dealogic, up from two a year earlier. Together they will be buying a record $7.5 billion worth of stock back from the market.
Many are focusing on other priorities as well. Restructuring or spinning off a business is easier when it has been taken private, according to Kerwin Clayton, co-head of M&A for the Asia Pacific at JPMorgan Chase.
"More companies are choosing to delist because the parent company's profits and shareholder returns have become more important," said an industry insider.
But there is also concern that delisting will remove state-run companies from market scrutiny, and reduce transparency into their practices.