But that switch hasn't happened. China's financial sector has been held back by the slow pace of reform, allowing Hong Kong's modern capital market plenty of room to grow. Not only has Hong Kong strengthened its position at the financial heart of Asia, but today it's competing with powerful centers in New York and London. Companies going public via Hong Kong's stock exchange in 2005 raised more money from initial public stock offerings$21.6 billion?than any other exchange except New York, according to Thomson Financial. Last year, Hong Kong ranked No. 1, beating out New York and London, with $41.1 billion raised.
A flood of IPOs by Chinese companies, including some record-breaking deals, is a major reason for that performance. To tap overseas investors, China's best companies?from mobile-phone operators to insurance firms?have made Hong Kong's stock market their No. 1 choice for going public. Why? The imposition of onerous reporting requirements on companies listing in the U.S. in the wake of the Enron scandal has knocked some of the shine off New York, while Chinese bourses in Shanghai and Shenzhen are often considered to be too immature and restricted (foreigners are allowed to trade freely only in certain shares). Besides, Hong Kong has no shortage of local and international investors who love to gamble on IPOs. In October, the Industrial and Commercial Bank of China, the country's largest bank, floated the largest IPO ever, raising $21.9 billion in a dual listing that included the sale of $16 billion worth of shares in Hong Kong. (The other shares were sold in Shanghai.)
It hasn't hurt that Hong Kong stocks have been on a tear. The benchmark Hang Seng Index repeatedly set new all-time highs in the latter part of 2006, gaining 34% for the year. The rally got a big boost from an influx of investors hoping to cash in on the appreciating yuan by buying shares in mainland companies. The Hang Seng China Enterprises Index, which includes only China stocks, soared 94% in 2006.