Clearing Ltd.'s executive officer Charles Li.
Clearing Ltd.’s executive officer Charles Li. (Lam Yik Fei/Getty)

Just over a week ago, Chinese e-commerce giant Alibaba Group Holding Ltd. confirmed that it will be pursuing its initial public offering this year in New York instead of Hong Kong.

The Asian financial center’s loss of the high-profile listing, expected to be the biggest in the world since Facebook Inc.’s $16 billion IPO in 2012, was telegraphed last fall, when the Hong Kong Stock Exchange said it could not accommodate Alibaba’s desire for a share structure that would give greater voting rights to founder Jack Ma and other officers. But Alibaba’s final decision, which coincided with announcements of U.S. listings by other Chinese tech companies, nonetheless swiftly renewed anxieties about Hong Kong’s future as an IPO destination.

Writing in a blog post after Alibaba’s announcement, Charles Li, chief executive officer of the Hong Kong Stock Exchange, said the exchange needed to push forward with reforms that will make it more attractive to emerging companies. “Losing one or two listing candidates is not a big deal for Hong Kong; but losing a generation of companies from China’s new economy is,” wrote Li, noting that microblogging service Weibo Corp. and online retailer Inc. are both also planning to list in the United States.

Starting in 2009, while the U.S. and Europe were still falling deeper into recession, a wave of listings by Chinese companies, especially state-owned enterprises, helped make Hong Kong the IPO capital of the world for three years. At that time, a number of non-Asian companies, including Italian fashion house Prada S.p.A. and U.S. luggage giant Samsonite International S.A., also chose to list in Hong Kong in order to tap Asia’s perceived greater liquidity. Many law firms, especially U.S. ones, responded to this IPO boom by launching or expanding Hong Kong law practices.

But the market slowed down sharply toward the end of 2011. The following year, the HKSE ranked only fourth in IPOs, after the New York Stock Exchange, Nasdaq and the Tokyo Stock Exchange. Last year, Hong Kong climbed back up to second place with listings worth $21.5 billion, but that was still less than half of the $44.1 billion raised on the NYSE.

The big question is where Hong Kong’s major listings will come from in the future. Though there is little doubt that mainland Chinese companies will still desire to list in Hong Kong, most of the biggest ones—the SOEs—have already done so. The wave of non-Asian companies coming to Hong Kong to have their IPOs also seems to have faded. Such trends are why major Chinese tech companies’ gravitation toward the U.S. is so worrisome to Hong Kong.

“The Hong Kong IPO market heavily relies on deals from China,” notes Lance Chen, a Shanghai partner with Baker & McKenzie. “There are times when people are worried that it might be difficult to find IPO candidates because the state-owned enterprises and major companies are listed already.”

Chen says such worries were somewhat allayed last year when many Chinese provincial banks and a number of private companies came to Hong Kong to list. Indeed, despite worries occasioned by the HKSE’s rejection of Alibaba’s proposals, the last quarter of 2013 saw the Hong Kong IPO market roar back to life. Six of the territory’s top 10 IPOs of 2013 took place in the last three months, including the two largest: China Everbright Bank Co.’s $3 billion listing and China Cinda Asset Management Co. Ltd.’s $2.5 billion IPO.

The strong deal flow has so far continued this year with the $3.1 billion IPO of tycoon Li Ka-shing’s Power Assets Holdings Ltd and the expected $5 billion listing by Chinese meat processor Shuanghui International Holdings Ltd. And a couple of Chinese SOEs have their sights on IPOs later in the year: Beijing Automotive Group is expected to raise $2 billion in the second quarter while China General Nuclear Power Group is also planning to raise $2 billion toward the end of the year. PricewaterhouseCoopers predicts Hong Kong listings could raise $32.2 billion in 2014, the largest amount since 2010.

“The market has already come back,” says Sammy Li, a Hong Kong partner at Paul Hastings. “The question is how long it will sustain.”

Kenneth Martin, a Hong Kong partner at Freshfields Bruckhaus Deringer, agrees. “I would say I’m cautiously optimistic about the market prospects given the current economic climate and the fact that quite a few deals were done at the end of last year,” he says. “But it’s difficult to predict market conditions with any sort of certainty.”

As big as some of them are, today’s Hong Kong deals still seem a far cry from the massive IPOs of the recent past. In 2010 alone, the territory had both the $17.9 billion listing of AIG’s Asia spinoff AIA and part of the largest IPO ever—Agricultural Bank of China, which raised some $22 billion in Hong Kong and Shanghai. The Alibaba listing was seen as harking back to those days, but many lawyers say they are facing a future with fewer blockbusters.

“Deal size will be smaller, but the number of deals will be increasing,” says Christopher Wong, a Hong Kong partner at Simpson Thacher & Bartlett. “But that is not to say there will be no big deals.”

One boost to Hong Kong in the last year was the freezing from late 2012 of the mainland Chinese IPO market by the China Securities Regulatory Commission, which governs the Shanghai and Shenzhen stock exchanges. Many Chinese companies that might have listed domestically turned to Hong Kong instead.

Though the CSRC lifted the domestic IPO ban in January, many lawyers think long waits to list in Shanghai and Shenzhen will still send many companies to Hong Kong. And many Chinese companies will continue to seek out a Hong Kong listing for stronger valuations and greater access to international capital.

But many Chinese tech companies favor listing in the U.S., with its large community of Silicon Valley-oriented analysts and investors, for similar reasons. The type of shareholder arrangement sought by Alibaba’s Ma is common among leading U.S. tech companies like Facebook and Google. Unlike Hong Kong, the major U.S. exchanges have no requirement that companies have a three-year track record of profitability, making them far more hospitable to buzz-heavy but revenue-starved startups.

Wong, whose firm is now representing Alibaba in its planned New York listing, says Chinese tech companies will probably continue to be attracted to the U.S. for some time. But he thinks Hong Kong might develop niche areas like Chinese-language online gaming.

“Last year, people saw companies like Forgame Holdings Ltd. and Boyaa Interactive were doing quite well, and now we are seeing more in the pipeline for this year,” says Wong.

At the same time, many leading Chinese gaming companies have found the U.S. market inhospitable and have sought an exit. Earlier this month, Shanghai-based game developer Giant Interactive Group Inc. announced that it had accepted former CEO Shi Yuzhu’s offer to take the company private and delist it from New York Stock Exchange in the second half. In an interview with newspaper China Business Journal, Shi complained that institutional investors in the U.S. lacked understanding of and confidence in the Chinese gaming industry, resulting in poor valuations. In January, Shanda Games Ltd., a competitor of Giant, also announced it was considering a $1.9 billion take-private offer, which would see it delist from Nasdaq.

Orrick, Herrington & Sutcliffe Hong Kong partner Edwin Luk says the fact that Alibaba was eager to list in Hong Kong and only pulled out over the share structure issue actually shows that Hong Kong is a viable venue for tech IPOs.

“Traditionally, if you were a cutting-edge tech company, you wanted to go to New York because you wanted the depth of analyst coverage, and you wanted to communicate with the right investors who would understand your company,” he says. “But that is changing now, especially after people see companies like Tencent Holdings Ltd. doing so well in Hong Kong.”

Tencent, best known for its QQ and Wechat messaging platforms, is considered one of China’s three leading Internet companies, with Alibaba and search giant Baidu Inc. Tencent has been one of the HKSE’s top performers since it listed there in 2004. Baidu has also performed strongly since its 2005 Nasdaq IPO.

High compliance costs and litigation risks are other issues that Chinese companies must face with a U.S. listing. “For early-stage technology companies, New York will still be an attractive choice as a market with high concentration of capital,” says Baker & McKenzie’s Chen. “But people should keep in mind the regulatory requirements and the class action structure.”

Another big question mark over Hong Kong is whether Western companies will continue to seek to list there. A few years ago, it seemed U.S. and European consumer brands hoping to raise their profile in China were lining up for Hong Kong IPOs. Prada raised $2.14 billion in its 2011 listing, while Samsonite garnered $1.25 billion the same year. French cosmetic maker L’Occitane International S.A. also had a $708 million IPO in 2010. But what seemed to be the next big thing soon seemed to fizzle out. Since 2012, no major Western brand has listed in Hong Kong. U.K. football club Manchester United Ltd. considered it in 2012, but subsequently chose New York for reasons similar to Alibaba.

Luk thinks they will be back, though. “The reason why we haven’t seen as many overseas companies listed as three years ago was because the market was down,” he says. “It wasn’t a good time to launch high-profile IPOs, but when the market does come back, Hong Kong makes sense as a listing venue if the company wants to develop deep connection with the Chinese market.”

Paul Hastings’ Li, whose firm is advising Shuanghui on its planned Hong Kong listing, thinks the pickup in China deals will be enough to drive Hong Kong IPO market forward in the year ahead, even if the deals on average are smaller than a few years ago.

“I think even without Alibaba, this is still going to be a decent year,” he says.