Hong Kong IPOs Dent Shanghai's Global Ambitions

The Hong Kong stock exchange's recent success wooing foreign companies poses a new challenge to Shanghai's ambition to become a global financial center.

In the last week, an Italian luxury-goods icon and a secretive Swiss commodities trader became the latest fund-raisers from abroad to set their sights on Hong Kong. Prada SpA could launch an initial public offering in the city by the second quarter. Glencore International AG, a major force in trading metals and agricultural products, wants to raise as much as $10 billion with a dual listing in Hong Kong and London around the same time.

There are several noteworthy things about these two IPOs. Bankers see Prada as a door-opener for the luxury-goods sector, legitimizing Hong Kong as a venue to raise capital for an industry focused on selling its European heritage to Asian consumers. And Glencore adds heft to Hong Kong's underdeveloped resource sector, giving investors another way to bet on Chinese demand for commodities.

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Xinhua/Zuma Press

For now, Hong Kong has the edge over Shanghai in a contest on where to issue stock. Above, a pedestrian walks past a panel displaying Hang Seng Index in Hong Kong last month.

They bring to five the number of foreign companies now known to be staking out a home on Hong Kong's exchange since the beginning of the year. The others include a clothing retailer and a finance company, both from Japan, as well as a Kazakh copper miner.

One thing they have in common is a connection to Chinese growth, whether through sales of copper and cattle feed or Italian boots and Japanese blouses.

They also represent the kind of listing business that Shanghai's stock exchange hopes to win, too, through a much anticipated but long-delayed international board allowing foreign companies to issue stock directly to mainland Chinese investors. Only recently, the Shanghai's mayor stoked expectations when he declared "now is a good time to launch the international board."

But if Shanghai builds it, will they come? Not everyone is so sure.

Since their peak in August 2009, mainland Chinese shares have slid into bear territory. The Shanghai Composite Index has fallen 21% as domestic investors fret over Beijing's efforts to cool an overheated economy. Over the same period, the Hang Seng Index has risen 14%, reflecting foreign-investor optimism about China's long-term prospects.

That divergence has wiped out the premium that China's A shares, which are largely restricted to domestic investors, have traditionally enjoyed over the so-called Chinese H shares bought and sold by international investors in Hong Kong—and in fact has left many Hong Kong shares with a much richer valuation than those in Shanghai. So even if the international board were open for business, a company could get a better price for its shares in Hong Kong than in Shanghai, which is a "seismic change," in the words of one investment banker.

Higher valuations aren't the only reason companies choose to list on an exchange. Hong Kong's regulatory framework is more highly regarded and the market enjoys a broad investor base. Listing in Shanghai, for its part, could be a smart marketing ploy for a brand eager to raise its profile in a big consumer market. It also offers a chance to score political points with mainland Chinese authorities eager to promote the city's role as a financial hub.

Also, A shares won't stay cheap forever, says Jerry Lou, a China equity strategist at Morgan Stanley. China has a surplus of capital, restrictions on taking it offshore and few choices on where to invest at home, he notes—all forces likely to push A shares higher over time.

For now, though, Hong Kong has the edge in a contest on where to issue stock. Any company opting to sell shares in Shanghai would have to explain to board directors and shareholders why it chose to forgo the cheaper cost of capital.

This year, bankers expect a new wave of Hong Kong IPOs from multinationals looking to list their China operations, throwing out names of prospects like U.S.-based Yum Brands Inc., owner of KFC and Pizza Hut. Those are precisely the sorts of listings many expected Shanghai's international board to attract.

Hong Kong may not hold the edge forever. But it is making sure that if Shanghai is going to catch up as an international financial center, it will have to work a little harder to make up for lost time.

Write to Peter Stein at peter.stein@wsj.com