The Hong Kong Stock Exchange has taken another big step to attract Chinese companies, this time targeting small technology startups that may be full of potential but are still hungry for capital. Such companies could be attractive for investors, too, providing more opportunities to buy in early to promising companies at low cost. But the move could also backfire by introducing a new group of low-quality stocks, including some that fail to ever earn profits.
The U.S. has allowed such Chinese tech startups to list for years, and offers a lesson for what Hong Kong is likely to see. Many such companies ultimately fail to take off and end up delisting, but not before losing most of their value and leaving investors with big losses. Many investors still feel the gamble is worth the risk, however, as they seek to buy into the next Alibaba (BABA.US; 9988.HK) or Meituan (3690.HK) at the early stages when the stock is still cheap.
Hong Kong Exchanges and Clearing Ltd. (0388.HK), operator of the city’s stock exchange, implemented its relaxed rules for “specialist technology companies” at the end of last month, allowing them to list on its main board under a new Chapter 18C of its listing rules. The move came after months of work that included seeking feedback from various groups, including institutional investors, listing applicants, accounting firms and industry associations.