While we were enjoying our Thanksgiving holiday, folks in Hong Kong were celebrating too. But the jubilation there was the result of several seemingly disparate events.
What went down in Hong Kong this week is pretty amazing and worth digging into, as it might have been a little lost in all the turkey, football and bourbon. There were notable elections, Chinese e-commerce giant Alibaba debuted on the Hong Kong Stock Exchange and President Trump was forced to weigh in.
The week began with pro-Democratic, anti-Beijing candidates sweeping to landmark victories in local Hong Kong elections. The New York Times noted that these candidates “captured 389 of 452 elected seats, far more than they had ever won. Beijing’s allies held just 58 seats, down from 300. It was a strong message from Hong Kong voters, with record turnout of 71%.”
To be clear, this wasn’t the election of the chief executive, currently Carrie Lam, which really isn’t an election at all. That person is essentially hand-picked by Beijing through a 1,200-person electoral college.
These local candidates were actually elected. By the people. And the people chose Democracy.
Now you may be saying, “Duh?” right about now. Of course the people of Hong Kong would choose the good guys! Not necessarily. Many citizens of Hong Kong—officially a special administrative region of the People’s Republic of China—were said to have deplored the violent tactics of the protesters, and or feel an allegiance to Beijing.
Turns out not so much.
Things will get more complicated for Beijing
How did China—which leading up to the election was oh-so-confident of victory—respond? This way in an editorial in the China Daily:
...the results were skewed by the illegal activities of the opposition camp to the benefit of their candidates. In the run up to Sunday's voting, members of the opposition camp, particularly their young agitators, engaged in an all-out campaign to sabotage the campaign activities of pro-establishment candidates and intimidate their supporters from going to the ballot box.
Uh, yeah. Right.
What this means now is that things will only get more complicated for Beijing from here on out. Chinese President Xi Jinping bet on letting the people of Hong Kong decide, and they did. Only it was against him.
We’ll return to the political situation in Hong Kong momentarily, but before we do, another major development, this time on the business front.
On Tuesday, Alibaba executed a slam-dunk secondary offering in Hong Kong, raising $12.9 billion. That easily surpassed Uber’s $8.1 billion IPO in May, making it the biggest public offering of 2019. For those who were predicting the death of Hong Kong—and they’ve been doing that for decades, (and Kyle Bass and others are still at it)—that again appears to be premature.
You may remember that Alibaba went public on the NYSE in 2014 and raised $25 billion, still the biggest IPO. It did so in New York not because it wanted to, but because it could not do so in China, given that the giant Chinese e-commerce company had weighted classes of stock, (as part of its mind-numbingly complex capital structure), which was prohibited by the Hong Kong exchange. Founder Jack Ma and his executive team said all along they always wanted to sell shares in Asia.
Dual, multiple and weighted classes of stock are controversial because they preclude the one-share, one-vote concept fundamental to conventional notions of corporate governance. For decades in the U.S., weighted classes of stock were employed by a small group of companies such as The New York Times, CBS, and Ford. The argument was that these companies—often they were media businesses controlled by families—were important enough to need the protection afforded by weighted classes of stock to ward off short-term thinking and corporate raiders. They were special cases that only founders could really best understand or manage, the line went.
More recently Silicon Valley took notice and essentially said: “Hey, we’re special like that too.” And so, Alphabet, Facebook and Square and now dozens of other companies in the U.S. take advantage of this having-your-cake-and-eating-it-too, structure. (I say that because management gets to raise capital and not lose control.)
The Hong Kong exchange saw it was falling behind and last year loosened its listing requirements, allowing for weighted classes of stock. Alibaba took notice and ultimately did the secondary offering. (Another key change occurred in October when the Chinese government allowed mainland Chinese investors to buy stocks in Hong Kong with dual classes of stock.) All systems go.
And guess what? After the Alibaba listing, plus the Budweiser Brewing Co. APAC $5 billion IPO, Hong Kong has now topped the IPO rankings for 2019, with $34 billion raised, versus $24 billion and $22 billion for the NASDAQ and the NYSE, respectively.
And guess what else? The Shanghai and Shenzhen Exchanges are looking into easing restrictions too, allowing for weighted classes of stock. Don’t be surprised if BABA sells stock there too, someday.
So let’s review. The Hong Kong exchange had the more conservative take on governance. But it was losing out, so it took a page from our book, loosened its regs and now has leaped ahead of us. The mainland exchanges are next. Will Alibaba delist from the NYSE down the road? Maybe.
Is the US meddling?
Switching back to politics, later in the week, President Trump reluctantly signed two bills, one—the Hong Kong Human Rights and Democracy Act—“requires the State Department to certify at least once a year that Hong Kong retains enough autonomy to justify the favorable U.S. trading terms that have helped it maintain its position as a world financial center.” The other bans selling crowd-control munitions, such as teargas, pepper spray, rubber bullets and stun guns to the Hong Kong police. (Question: Why were we doing this in the first place?) Trump was forced to sign the bills after they passed the Senate unanimously and the House 417-1 (Rep. Thomas Massie, R-Ky.) voted against it, obviously passing by wide enough margins to override a presidential veto.
“I signed these bills out of respect for President Xi, China, and the people of Hong Kong,” Trump said in a statement. “They are being enacted in the hope that Leaders and Representatives of China and Hong Kong will be able to amicably settle their differences leading to long term peace and prosperity for all.”
Read between those lines.
In Hong Kong, protestors were delighted, celebrating Trump’s move and calling it a “timely Thanksgiving gift”—while China was furious, vowed retaliation and summoned the U.S. ambassador in Beijing.
Focusing just on the human rights bill, I have to say Trump was right to be circumspect, even though it’s likely to be pretty toothless. Some Chinese have accused the U.S. of meddling in Hong Kong. (One claim is that the CIA funds the protesters. I don’t think the Agency is either that stupid or that smart, I’m not sure which.) In a way this bill is meddling. Imagine if the Chinese said they weren’t going to buy our soybeans unless the U.S. improved conditions on Indian reservations, or you name it.
The bill also serves to conflate what’s going on in Hong Kong with our trade negotiations, and that’s not good.
Don’t for a minute accuse me of being an apologist for Chinese authoritarianism. Beijing’s human rights violations are reprehensible and indefensible. And I understand and support Democratic protests, like those in Hong Kong. It’s just that American politicians apply their outrage on these issues not so much based on genuine concern as political expediency. Human Rights Watch and other NGOs warn equally or more about conditions in our sometimes allies such as Turkey, the Philippines and Hungary, never mind Russia and Saudi Arabia. To see Democrats and Republicans suddenly glom onto the Chinese protester bandwagon smacks of: “I’m against Chinese Communism! Remember to vote for me in November!”
It also leads to the ultimate question of what is it that the protestors—and U.S. politicians—really want that is feasible? The Hong Kong government has already withdrawn the controversial bill that would have allowed for extradition to mainland China, which was what the demonstrators wanted removed and what led to the protests in the first place. They later added four more demands, such as an investigation into police behavior and the release of arrested protesters. And they are calling for the resignation of Lam and a reformed election process. That would be tricky. And then what? Complete independence from China? Not happening. Return to British sovereignty? Nope.
It’s not so simple, unless you’re just checking a box, which is what Congress is really doing.
China continues to evolve
So, how does Alibaba’s secondary offering tie in with Hong Kong’s elections and the Trump bill signing? For one thing, it underscores that China’s path forward is and will be uneven, but it is forward. Increasingly this is true with or without the U.S. Alibaba’s big deal shows that despite the trade war, slower economic growth and Western capitalism bashing, China continues to reform and modernize. Yes the process here was through Hong Kong, but that has long been the playbook.
The Hong Kong political situation is complicated and requires much attention and nuanced thinking on the part of Beijing. Some have said that instead of making Hong Kong more like China (the death of Hong Kong crowd), the idea was always to gradually make China more like Hong Kong. That could still be the case.
And what is America’s role in China’s evolution and how should our leaders play it? For starters, we need to focus and understand the nuances too.
Events in Hong Kong and China are moving fast. Are we?
This article was featured in a special Saturday edition of the Morning Brief on November 30, 2019. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Commentary by Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer.