Why this flagship listing could be bad for Hong Kong

Rusal's IPO in Hong Kong offers a warning to the territory on what it should avoid if it wants to be Asia's financial centre.

Is the fact that Russia's Rusal has chosen to list in Hong Kong an encouraging sign of the market's growing relevance to foreign firms? Not really. In fact, this messy deal offers more warnings on what the territory should avoid if it wants to be the financial centre of the Asian century.

The aluminium group controlled by controversial oligarch Oleg Deripaska originally planned to float in London in 2007, but put this off while it pursued a tie-up with Norilsk Nickel. That bid collapsed during the financial crisis, and the heavily indebted Rusal found itself in a sticky situation.

Raising some cash through an IPO became even more expedient. However, tougher listing rules, litigation in London between Deripaska and a former associate, and souring relations between Britain and Russia led to a change of plan. Rusal decided to go for a listing in Hong Kong instead, with a secondary listing in Paris.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Getting that off the ground hasn't proved easy. The Hong Kong exchange had serious reservations about the IPO, centring on Rusal's debts. Approval was subject to unprecedented conditions aimed at keeping it out of the hands of retail investors: investors in the IPO must subscribe for a minimum of HK$1m ($129,000) each, and once listed it will trade in lots of HK$200,000.

Given that level of squeamishness, the exchange should have been firm and rejected the listing outright. While a flagship Russian IPO might seem a good way to lure more non-Asian firms to Hong Kong, lowering your standards often turns out badly.

Take Singapore, whose efforts to attract Chinese firms resulted ina number of scandals as boom turn to bust.

Or indeed London, which allowed a flood of poor quality listings on the second tier Aim market. That put the City at the head of the IPO table in 2006. This year, it fell out of the top ten.

The new number one? Hong Kong, riding high on the China boom. Hopefully its success wont be so fleeting. But giving a home to stocks like Rusal is no way to assure that.

Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.