Why this flagship listing could be bad for Hong Kong

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.

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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.