China: Three decades, six leaders – Fred Hu
When former Goldman Sachs rainmaker Fred Hu moved to Hong Kong in 1997, the local stock exchange was tiny and Chinese companies had little presence in the offshore markets. But Hu immediately found himself at the heart of a sea-change in the region while working on his and Hong Kong’s first big IPO, the $4.23 billion dual listing of China Telecom (HK), now known as China Mobile, in Hong Kong and New York.
That listing was an important step in the opening up of China to the world, but it was also a crucial part of Hong Kong’s rising importance as a global capital market.
“The rise of China as an economic power and the reform and opening up really have been instrumental in transforming Hong Kong from a regional financial hub into a leading global financial centre on a par with New York and London,” says Hu.
A large part of Hong Kong’s rise can be put down to a seemingly endless supply of state-owned enterprises ripe for privatization. And Hu’s efforts put Goldman Sachs at the forefront in the local market, bringing many of the mainland’s largest SOEs to the Hong Kong Stock Exchange.
Some of the most memorable deals he worked on were China’s big four banks. Hu spent three years cleaning and sprucing up Bank of Communications before facilitating the first foreign strategic investment in a Chinese bank: HSBC bought a 19.9% stake in 2004. Goldman Sachs and HSBC took BoCom public in the same year. Then came Bank of China in 2006, while around the same time Hu helped broker an investment by Goldman in ICBC.
But for Hu the final stage of development for Hong Kong’s stock market came with the enormous listings of tech firms Tencent Holdings in 2004 and Alibaba Group a few years later.
“Tencent was a trailblazer as the first significant tech company listing in Hong Kong, followed by another milestone set by the e-commerce giant Alibaba’s listing,” says Hu. “You had these big, new-economy leaders come to Hong Kong and that really broadened and ultimately transformed Hong Kong as a market.”
Chinese tech companies now regularly turn to the US for listings, relying on the country’s deep pool of tech-savvy investors. But that was not an option for Tencent.
“After some initial research and a non-deal roadshow in the US, it was very clear that US-based investors, even tech specialists, did not understand Tencent,” says Hu. “The company [managed] QQ, which was kind of like an early version of social media, and there was nothing like it in the US, and then you had the fact that the majority of Tencent’s revenue was from gaming. There was no such company like this in the US.”
After 13 years of service bringing mainland Chinese companies to the global markets, Hu struck out on his own.
At Goldman he had held senior titles, including chairman of Greater China, co-head of investment banking China, and chief economist.
But in 2010 he founded Primavera Capital Group, a China-based investment firm that runs a series of renminbi and US dollar funds for institutions, corporates and high net-worth families.
Although he is no longer in investment banking, Hu still has strong opinions on the future of China’s capital markets. As an advocate of the country’s embrace of capitalism, he says one of its last steps to open up is making Greater China’s stock markets freely connected.
“The main task between China and Hong Kong is to make the markets more integrated,” says Hu. “A high degree of capital mobility underpinned by currency convertibility is the key linchpin connecting Hong Kong with mainland markets. Then Hong Kong would become [not just] the Chinese financial centre, but also China’s global financial centre, like London or New York.”
The Shanghai and Shenzhen stock connect schemes with the HKEx, which allow a level of cross-border trading are a start, but not enough.
Hong Kong has the internationally recognized regulatory standards that China needs and, largely, a greater level of the necessary transparency than the mainland. The regulator is also moving with the times, which gets a thumbs up from Hu.
“I am a big proponent of innovation in market structure,” he says. “Rules from 30 years ago are likely not going to be the right rules for today. You have to keep some regulations, but then modify and update other parts as well.”
Recent examples include Hong Kong’s introduction of dual-class shares and pre-revenue listings for certain sectors in early 2018. The former had been in discussion since the city lost Alibaba Group Holding’s record IPO to New York in 2014.
“Regulators should not second-guess the market,” adds Hu. “Let the market pick the winners. In true capitalism, investors can vote with their feet.”