(Bloomberg) -- China’s vow to encourage the nation’s leading companies to list in Hong Kong is helping spur a rare surge in the $5 trillion stock market, but dealmakers aren’t ready to turn optimistic. 

The Hang Seng Index jumped about 9% last week for its best gain since 2011 after China’s securities regulator said on April 19 that it will support initial public offerings in Hong Kong. Bourse operator Hong Kong Exchanges & Clearing Ltd. was among the biggest winners, rallying 17%.

While a number of factors drove the index’s gains, including bullish analyst calls on China and inflows by mainland investors seeking a hedge against a weakening yuan, the regulator’s comments sent a signal that the city could expect more favorable policies to strengthen its position as a finance hub.

Dealmakers say a lot more than words is needed to revive Hong Kong’s weakest IPO market since the global financial crisis. Interviews with 10 advisers show they expect the pipeline of IPOs to remain feeble while valuations are low, China’s economic outlook is poor, and foreign investors continue to be distrustful of Beijing’s policy making. 

“So far, it’s just cheap talk,” said Jason Hsu, chief investment officer at Rayliant Global Advisors. “Beijing needs to be much more specific on how it will support Hong Kong.”

Low Valuations

Even after last week’s gains, the Hang Seng Index is one of the world’s worst-performing benchmarks over the past 12 months. The gauge trades at 8.6 times projected 12-month earnings, compared with the S&P 500’s multiple of about 20 and 11.4 for China’s CSI 300 Index. Global funds that went long on China have been burned a number of times in recent years by sudden crackdowns that triggered dramatic selloffs.

There is a compelling need for Beijing to shore up the IPO market. The decline of Hong Kong as a fundraising center for companies has undermined the city’s claim to be Asia’s premier financial hub and diminished Wall Street’s presence.

Read More: Hong Kong Bankers Have Lots of Free Time, Anxiety as Deals Slump

Proceeds from IPOs in the first quarter were the lowest since 2009, following on from a dismal showing last year, when the city lagged behind Mumbai. An estimated 200 Hong Kong bankers lost their jobs in the past year, according to Bloomberg Intelligence. Banks including Morgan Stanley and HSBC Holdings Plc are planning more cuts.

Hong Kong is stuck in a bind when it comes to IPOs, as stronger companies stay away and weaker listings draw lukewarm interest, thereby reinforcing the negative narrative. 

“Investors may not want to bet on firms facing uncertainties about future growth, and those with better fundamentals may not rush and will only list when sentiment improves,” said Gary Ng, a senior economist at Natixis SA.

Poor Debuts

This pattern was starkly illustrated last week, when three stock debuts flopped, even as the broader market rallied. 

Bubble-tea maker Sichuan Baicha Baidao Industrial Co., which is known as Chabaidao, sank 27% on its first day of trading in the city’s largest IPO since November. Shares of Tianjin Construction Development Group Co., which provides engineering services, slid 39% in their debut. Mobvoi Inc., a Chinese artificial-intelligence developer backed by Google, fell 3% as it traded for the first time.

Read More: Bubble-Tea Maker Chabaidao Slumps 27% in HK’s Biggest 2024 Debut

Chabaidao’s slump may put a planned Hong Kong listing by Midea Group Co. at risk, according to Bloomberg Intelligence. Weak investor sentiment may lead Midea, the world’s largest home-appliance maker by market value, to reevaluate the timeline for a share sale despite its solid fundamentals and promising earnings prospects, analyst Ada Li wrote in a report Monday.

Hong Kong hasn’t hosted a debut larger than $1 billion since October 2022, when battery supplier for electric-vehicle makers CALB Co. raised $1.3 billion. The average size of a Hong Kong IPO last year was $88 million, 70% less than the $294 million median from 2018 to 2022.

Other possible large-cap listings that would typically generate foreign interest include battery-maker Contemporary Amperex Technology Co. Ltd. and fast-fashion company Shein. The latter is considering Hong Kong as a possible venue along with London and Singapore because of hurdles to a US listing, Bloomberg News reported in February.

Mainland Approvals

One potential tailwind for Hong Kong is the pace of IPOs on mainland exchanges is likely to remain low for years to come due to stricter controls, meaning companies will need to look for alternative venues, said Andy Wong, IPO leader at advisory firm SW Hong Kong. The Chinese regulator may also speed up approvals for Hong Kong listings, he added.

“Hong Kong IPOs may have a small boom in 2025 and 2026,” Wong said. “The A-share IPO slowdown period may last up to two years.”

Read More: India, Korea and Japan to See More IPOs While China Stalls 

Proceeds raised on mainland exchanges dwindled in the past two quarters as Chinese authorities limited approvals to boost liquidity.

In addition to encouraging Hong Kong IPOs, the China Securities Regulatory Commission announced a loosening of rules on stock trading links between the city and mainland exchanges to boost flows into the city’s financial markets. 

There are also signs the CSRC is easing controls on US listings after the regulator said it will support overseas IPOs of tech firms. Autonomous driving startup Pony.ai is planning to sell shares for the first time in New York after receiving Chinese regulatory approval, according to a statement last week.

Read More: Zuoyebang Said to File for US IPO as China Edtech Campaign Wanes

Whether in New York or Hong Kong, Chinese firms face a credibility gap when it comes to foreign investor confidence. Just last month, Sharmin Mossavar-Rahmani, the chief investment officer of Goldman Sachs Group Inc.’s wealth-management business, advised against investing in China. She cited reasons including a lack of clarity on Beijing’s policymaking and expectations for a steady slowdown in the economy over the next decade.

All that and a multiyear slump in Chinese stock benchmarks mean the path to reviving IPOs will likely be a rocky one. The Hang Seng Index has fallen for the past four years and is down more than 40% from its 2021 high.

“The number one task for Beijing right now is to shift the prevailing narrative that China is uninvestable,” said Rayliant’s Hsu. “New listings in Hong Kong won’t help if global investors aren’t interested in owning shares in Chinese companies.”

--With assistance from Pei Li and Dong Cao.

©2024 Bloomberg L.P.