Was Alibaba a Trojan Horse for Hong Kong?

Alibaba Group Holding Ltd. didn’t hide its frustration when turning away from Hong Kong in 2013 and choosing to list in the U.S. instead. 

“The question Hong Kong must address is whether it is ready to look forward as the rest of the world passes it by,” co-founder Joe Tsai wrote in a blog post that chastised the city’s exchange for rejecting Alibaba’s governance structure. Eight years on, those words have a prophetic ring. History has come down on the side of Tsai’s warning, and Hong Kong’s market has changed as a result. The controversy won’t go away, though: It turns out the future comes with weaker shareholder protections.

Alibaba eventually sold shares in Hong Kong in 2019, raising about $13 billion in the first secondary listing by a U.S.-traded Chinese company under revamped rules. The sale proceeded after regulators softened their opposition to weighted voting rights, dual-class shares and other structures that were once thought to pose an unacceptable risk to shareholders. That opened the floodgates. Since Alibaba’s debut, more than half of the 10 biggest initial public offerings in Hong Kong have been by other overseas-listed Chinese tech companies seeking a “homecoming.”

Even that may understate the importance of this cohort. Two more of those deals are units of U.S.-traded JD.com Inc., an Alibaba rival that raised $4.6 billion in its own secondary listing in June last year. While some of the biggest fish have already sold shares in Hong Kong — including NetEase Inc., Baidu Inc. and Bilibili Inc. — there are dozens more that could follow. It’s a lucrative pool of potential future business.

That explains why Hong Kong Exchanges & Clearing Ltd. is doing more to smooth the path for secondary listing applicants. The exchange is proposing to overhaul its listing regime for overseas issuers, replacing a plethora of scattered regulations with a set of “core standards” that would apply to all. HKEX says current rules may be “unduly burdensome and unappealing to prospective applicants” and its proposals represent the best way forward while “ensuring appropriate safeguards.”

Some investors are far from convinced. The core standards set a lower bar than Hong Kong’s company law in some areas and represent a deterioration in shareholder protection, according to the Hong Kong-based Asian Corporate Governance Association, which is funded by institutional investors with more than $40 trillion of assets under management. “This will deepen a regulatory divide where different categories of issuers play by different sets of rules,” Secretary General Jamie Allen and Research Director Jane Moir say in the ACGA’s response to the exchange’s consultation paper. “There is a growing number of secondary-listed firms who are large and influential in the market yet follow much lower governance standards as primary issuers.”

The association’s list of objections is long. Secondary-listed…