(May 9): Hong Kong is turning to oil-rich Saudi Arabia for new funds to help offset a growing list of challenges facing its stock market.

The Saudi Tadawul Group and Hong Kong Exchanges & Clearing Ltd are co-organising a conference Thursday at a very opportune time given the city needs fresh stock listings and fund inflows to boost its status as a financial hub. While Hong Kong stands to benefit from the forum, it will also involve an army of Saudi company officials seeking more exposure to Asian investors.

“There is strong political will that is pushing for this relationship between China and Gulf countries,” said Edmond Christou, an analyst at Bloomberg Intelligence in Dubai, who recently met with investors and companies in Hong Kong, Shanghai and Beijing. “When you talk to businesses in China, you hear that clients are interested in investing in the Middle East. They are looking for ways to make that happen.”

Thursday’s conference shines a spotlight on the latest strategy of Hong Kong’s bourse operator to attract new investors to replace those from the US and Europe, who may be deterred from doing business in China at a time of rising geopolitical tensions. The nation’s securities regulator also said last month it will encourage more firms to hold initial public offerings in the city.

Hong Kong Exchanges & Clearing has been having a tough time in recent years. The stuttering Chinese economy and increased saber-rattling between Beijing and Washington have sapped investor interest for China-linked shares. The amount of funds raised by IPOs in the financial hub slumped to US$610 million (RM2.9 billion) in the first quarter, the lowest level since 2009, while the bourse operator’s shares have plunged more than 50% from their highs of early 2021.

Hong Kong Exchanges & Clearing CEO Bonnie Chan is betting on the comeback of big ticket IPOs to the city. Speaking at Thursday’s event, she said there are 100 applications in the pipeline and more expected to come.

“What we’ve seen lately, in the last two weeks of April, it’s giving us a lot of hope,” she said.

Saudi side

The appeal of closer ties with China are clear from the Saudi Arabian side too. Crown Prince Mohammed bin Salman is working to increase foreign ownership and pump liquidity in publicly-traded stocks under the kingdom’s Vision 2030 agenda.

In contrast with Hong Kong, the Saudi stock market has been going from strength to strength. Market capitalisation of the bourse has climbed 11% over the past three years, while Hong Kong’s has dropped 25%. The main equities gauge in Riyadh has risen in seven of the last eight years, with a surge in inflows from foreign investors since 2019, when index compiler MSCI Inc. added the country to its emerging-markets equities benchmark.

Saudi Arabia’s stock exchange is also enjoying a fresh burst of IPO activity in recent weeks and said more than 10 applications for listings have been approved. Upward of 50 companies have launched applications, Tadawul stock exchange CEO Mohammed Al-Rumaih said on Thursday at the conference.

Since November, investors in Hong Kong have been able to gain exposure to the Saudi market through the CSOP Saudi Arabia ETF, the first exchange-traded fund of its kind in Asia. The ETF debuted with more than US$1 billion in assets and the backing of Saudi Arabia’s sovereign wealth fund. Even so, it only attracted around US$12 million in funds from its inception through April 24, according to calculations from Bloomberg Intelligence.

CSOP Asset Management Ltd is working with asset managers to obtain regulatory approval for a cross-listing of the ETF in Shanghai, which should hopefully take place in the second half of this year, said Melody Xian He, deputy chief executive officer at the money manager in Hong Kong.

Chinese investors “are aware of the Middle East opportunities, but I think that, for most of them, it’s hard to differentiate Saudi Arabia versus other markets,” she said.

Hong Kong announced on Thursday it’s working with Saudi Arabia to launch an ETF in Riyadh that tracks Hong Kong’s stock indexes. Formal negotiations have begun for an “investment promotion and protection agreement” between the two hubs, said Michael Wong, Hong Kong’s deputy financial secretary.

“The friendship and partnership between Hong Kong and Saudi Arabia will go very far and will endure the test of time,” he said.

Hong Kong Chief Executive John Lee has long touted his ambitions to persuade the world’s top oil producer Saudi Aramco to seek a dual-listing in the Asian financial center. While there’s no sign of that happening in the near future, it would be a huge vote of confidence in the city’s exchange if it takes place.

When asked about the potential for Saudi Arabian companies to cross list in Hong Kong, Saudi stock exchange CEO Al-Rumaih said “we want to have a path ready for them in case they decide to do so.”