FOR Charles Li, Alibaba was the one that got away. The head of the Hong Kong stock exchange (HKEX) courted the Chinese e-commerce giant when it sought a venue for its listing five years ago, but he could not push through rule changes wanted by Alibaba to keep control of the company in its leaders’ hands. It opted instead for an initial public offering (IPO) in New York. “Losing one or two listing candidates is not a big deal for Hong Kong,” he wrote at the time. “But losing a generation of companies from China’s new economy is.” Since then he has been determined to make the next big catch.
It is finally within his grasp. After a debate that has trundled on for several years HKEX is, in the coming weeks, poised to allow companies to issue shares with different voting rights. Known as dual-class shares, these give founders the ability to control their firms, even as minority owners. This should make Hong Kong the favoured destination for the next wave of Chinese tech firms to go public, from Xiaomi, a smartphone maker, to Ant Financial, Alibaba’s fintech spin-off. It should also bolster the city’s claim to being Asia’s leading financial centre.
But Mr Li’s success is controversial. Some of the biggest investors in Hong Kong warn that the changes will undermine corporate governance and harm most shareholders. They fear a “race to the bottom” around the region, as David Smith of Aberdeen Asset Management Asia puts it. Singapore, Hong Kong’s rival for financial pre-eminence in Asia, is on track to be the next market to allow dual-class shares. There are murmurings that some of the bigger exchanges in South-East Asia might follow.
The erosion of “one share, one vote”, long a cornerstone of equity markets, began in the 1980s on the New York Stock Exchange. The tech boom of the past decade accelerated the shift to dual-class shares, starting with Google’s IPO in 2004. Companies say unequal voting rights enable them to escape the short-termism of stockmarkets. Critics counter that conventional shareholding structures can serve long-term goals just as well, with less chance of mismanagement. Ironically, as Asia adopts dual-class shares, opposition is mounting in America. Last year FTSE Russell and S&P, two big index providers, barred companies from joining their stockmarket gauges if they list only non-voting shares.
The Hong Kong and Singapore exchanges have both pledged safeguards. HKEX has proposed that companies with dual-class shares must have an additional corporate-governance committee to ensure they are managed for the benefit of all shareholders. More boldly, Singapore might include a sunset clause, establishing a date at which shares with extra voting rights convert into ordinary shares. And both exchanges say they want to restrict dual-class shares to firms in innovative, emerging sectors.
But Jamie Allen of the Asian Corporate Governance Association predicts they will have a hard time holding the line against powerful companies in other sectors. “Once the genie is out of the bottle, it’s out,” he says. Over time, the fear is that if the standards of their stockmarkets slip, the reputation of Asia’s financial centres as generally clean, reliable places to do business will suffer, too.
In recent years the fortunes of the two exchanges have diverged. HKEX gained momentum from a flurry of initiatives, most notably a channel for cross-border trading with Chinese mainland stockmarkets. Singapore, meanwhile, faces stiffer competition from exchanges in the surrounding region. HKEX hopes dual-class shares will boost it further. For the Singapore exchange, they are a way to defend its turf. Concerns about shareholder rights are unlikely to stop either of them.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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