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Mainland and Hong Kong bourses reach dual-class share consensus

Xiaomi gains but analysts flag uncertainty over trading in 'new economy' companies

Xiaomi Chairman and CEO Lei Jun gets ready to ring the opening bell at the Hong Kong exchange on Monday.   © AP

HONG KONG -- Mainland bourses have agreed to give domestic investors access to Hong Kong dual-class structure shares through the cross-boundary stock trading channel, according to a statement by the Hong Kong Stock Exchange, reversing their surprise ban announced just four days ago.

Xiaomi, the first stock listed in Hong Kong with the so-called weight voting right (WVR) structure, rose as much as 6.2% in morning trading on Wednesday, but retreated later to close the day up 3.1%.

Despite the initial agreement, market watchers flagged up uncertainty over China's "new economy" companies which seek a Hong Kong listing, as there are still many questions left unanswered.

The announcement marks a victory for Charles Li, CEO for Hong Kong Exchanges & Clearing. As a big advocate for WVR, Li made an urgent trip to Beijing on Monday evening, after the Shanghai and Shenzhen exchanges took the Hong Kong bourse and investors by surprise over the weekend. The two mainland bourses unilaterally announced that dual-class shares would not be included in the stock connect program which links the mainland and Hong Kong exchanges. The news saw smartphone maker Xiaomi's shares fall as much as 10% on Monday, before largely recovering to close down 1%.

The Hong Kong Stock Exchange said in a statement it had reached a "consensus" with the Shanghai and Shenzhen exchanges following a "productive meeting." It did not give a timetable for including the Hong Kong WVR shares in stock connect trading.

Under the current plan, eligible securities have to survive an initial Special Stability Trading Period (SSTP) before their official inclusion, the statement said, as "mainland investors are not yet familiar with WVR companies." Mainland regulators only allow trading of companies with a "one share, one vote" structure.

The three exchanges also agreed to set up a joint working group to formulate specific programs and supplementary rules so that WVR companies can be included in stock connect trading "as soon as possible".

Despite Xiaomi's modest gains on Wednesday, market watchers are not expecting the policy announcements to give a major push to the share prices of foreign-listed WVR companies.

"There are still a lot of questions hanging in the air. We don't know exactly when dual-class shares will be included and what conditions the companies need to meet," said Harry Yuen, associate director at Oceanwide Securities. The consensus would not become a reality for at least another six months, given the caution shown by mainland regulators on dual-class shares, he said.

The fast recovery of Xiaomi's shares on Monday and subdued gains on Wednesday reflected the fact that the company's market movements are largely driven by news-generated momentum rather than concrete support for its prospects, Yuen added.

He expects Xiaomi's shares to come under pressure in the coming months as China Tower, the world's largest operator of mobile phone network masts, hits the market as early as August. Reuters reported that the state-owned company plans to raise up to $8.8 billion for a Hong Kong listing in what would be the world's largest IPO so far this year -- a title currently held by Xiaomi.

Given the policy flip-flops over dual-class shares over the past few days, Alvin Cheung, associate director of Prudential Brokerage, expects the Xiaomi saga to take a toll on the valuations of future WVR stocks listing in Hong Kong.

"It is good to know that Beijing does not want to ban WVR completely ... but I think these companies do not dare to target such a high valuation as Xiaomi did for sure," he said, citing the company's early decision to withdraw a planned share sale through China's newly created depositary receipt program.

Xiaomi was expected to be among the first to take part in the program that intends to bring overseas-listed tech giants home through a secondary listing. Many of the internet-based companies -- including Alibaba Group Holding, Baidu and -- have a dual-class structure, as founders often hold more voting rights than ordinary investors to retain control over the company's operations.

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