Borrowing and Lending in Hong Kong
The Hong Kong Stock Exchange (“SEHK”) also known as the HKEx is itself a publicly traded company (stock code 0388) and comes in third as Asia’s largest market exchange in terms of market capitalization just after the Tokyo Stock Exchange and the Shanghai Stock Exchange. The Hong Kong Stock Exchange is the seventh largest in the world. Beginning in January 2012, the Hong Kong Stock Exchange boasts over 1,450 listed companies with have a combined market capitalization of over HK$16 trillion.
The HKSE is a vibrant and transparent market place; this means that there are numerous methods of financing available to stockholders. To best facilitate and provide total clarity it is recommend that all stock loans be processed through the Central Clearing and Settlement System (CCASS).
There are two exchanges which make up the Hong Kong Stock Exchange (HKEx). These exchanges are referred to as the Main Board and the Growth Enterprise Market or (GEM) Board. The requirements for listing vary between the two exchanges however they both clear through a single platform the CCASS system. The Main Board is the tradition exchange for the more financially secured and established companies. The GEM board is more of an incubator for startups, high risk and rapidly growing companies. Companies who require speculative capital often list on the Growth Enterprise Market in Hong Kong before moving over to the main board.
Relatively speaking, Hong Kong has been only modestly affected by the credit crunch of 2008. The overall number of traders, both locally and internationally that participate in the Hong Kong markets, has declined since 2008; this has resulted in the decline of liquidity. Thus many lenders increasingly took on a more conservative attitude as large corporations grew and small companies disappeared. The market has slowly improved in 2009, 2010, 2011 and 2012.
Hong Kong’s finance and commerce laws are well defined. Hong Kong has a free economy, permitting even non-residents to easily trade stock. As a result many types of alternate financing have developed for listed companies and shareholders for Hong Kong Stocks. For example many shareholders have begun to borrow money against their stock. This practice is often referred to as stock borrowing or share financing. Many borrowers in Hong Kong prefer stock loans as they are generally non-recourse unlike margin loans which are full recourse.
For a borrower, share financing has a number of significant benefits. One of the major advantages of a stock loan is the ability to create instant liquidity on a stock position.
Once a stock loan has been funded the Borrower has very effectively hedged their position. In the event that the global markets turn downward and the value of the stock declines, the borrower is only minimally affected. This is due to the fact that the Borrower obtained a high loan to value ratio (LTV) and the loan is non-recourse which means if the global markets collapse the Borrower can simply walk away and keep the borrowed funds. Conversely, if the stock appreciates in value, the borrower will realize the upward price movement. The stock loan processing is simple and the closing can be accomplished swiftly. Share financing provides a great alternate source of financing for Honk Kong listed companies and shareholders.
Today, a significant amount of the world’s financial activities is done in Hong Kong. This includes market capitalization and capital infusions from hundreds of global financial institutions involving 90 of the world’s top 100 banks. Although the HKSE is directly connected with the Chinese economy which has grown anywhere from 7% to 14% percent annum during the last decade, the Hong Kong Dollar (HKD) is pegged to the U.S. Dollar (USD) with at steady exchange rate of Approx $7.78 HKD to $1.00 U.S Dollar. The U.S. Dollar / Hong Kong Dollar peg provides Hong Kong with the best of both financial worlds.