The Jockey Club, where bets can be placed on horse racing and soccer, is full of prospective punters. Nearby Macau, the only place in greater China that allows casinos is also booming with hordes of gamblers. At the current rate, analysts expect Las Vegas Sands (LVS: news, chart, profile) will make back its investment in Sands Macau, the first Las Vegas-style casino in Asia, by the end of its first year in May.

Optimism in the casino generally corresponds with optimism in the stock market in this city, and 2004 has been no different, with the Hang Seng Index up over 12 percent since the start of the year.

Market capitalization of the stock exchange reached an all-time high of HK6.7 billion ($860 million) on Dec. 15, with turnover in 2004 already exceeding the record of HK$3.78 billion ($486 million) set in 1997, the year Hong Kong returned to China.

Gains have been driven by the fact that increasingly larger Chinese companies are choosing to raise capital in the city. Mainland companies have been flocking to Hong Kong's markets since 2003, when the Closer Economic Partnership was forged to ease tariffs and barriers to banks and other industries in Hong Kong. See related story.

And analysts expect more of the same in future. "As more the Chinese liberalize and choose to invest overseas, I think Hong Kong is a natural platform for Chinese companies," Eden Woon, head of the Hong Kong General Chamber of Commerce, said.

IPO junket to Hong Kong

Mainland Chinese companies listed in Hong Kong are categorized as H-shares or Red Chips. H-shares are those without large government stakes, which are incorporated in the mainland and approved for listing by China's Securities Regulatory Commission.

Red Chips are listed and incorporated in the Hong Kong, but owned in significant proportions by the Chinese government or through state-owned enterprise. This can be direct or indirect; around 35 percent of companies in the Red Chip index are held by state-owned enterprises or Chinese provincial governments.

Mainland Chinese companies not only account for around 30 percent of the total market capitalization of the Hang Seng, but have raised HK$71 billion this year. That represents 75 percent of all initial public offerings in 2004, according to a recent report in the South China Morning Post.

Total funds raised this year are expected to exceed HK$280 billion, which would make Hong Kong the world second largest fund-raising market after New York.



The 'China factor' can be seen most clearly in the HK$8.4 billion IPO of Air China (HK:753: news, chart, profile) (UK:B04V2F7: news, chart, profile), the country's largest international carrier. The retail portion of the listing in Hong Kong and London was 83 times oversubscribed, causing underwriters to allocate 40 percent of shares to retail investors, rather than the original 10 percent.

Shares in Air China surged 8.2 percent to HK$3.23 on the first day of trading on Dec. 16. That's a pattern that has followed for other Chinese IPOs in Hong Kong this year. Telecoms equipment maker ZTE (HK:763: news, chart, profile) jumped nearly 11 percent on its first day of trading earlier in the month.

Air China's performance was much better than three other mainland companies that also debuted that day, but brokers said the market supported demand for all four, proof that investors are betting on Chinese companies for the long term.

"Chinese stocks definitely have helped the liquidity of the market," William Leung, investment analyst for China at HSBC Asset Management, said.

Coal, banks in pipeline for 2005

China also has a lucrative pipeline of IPOs planned for 2005. Chinese companies are expected to raise around HK$311 billion next year, with most choosing to list in Hong Kong.

One of the first is China's biggest coal company, Shenhua Group, which is expected to raise over HK$7.7 billion via a listing in the first quarter. In the industrial sector, steel majors Jianlong and Kunming are also expected to list early next year and raise HK$5.8 billion altogether.

Bank of Communications and the China Construction Bank, two of the 'big four' state-owned banks, and the Bank of China are also expected to list next year. Bank of Communications, of which U.K. bank HSBC (HBC: news, chart, profile) (UK:HSBA: news, chart, profile) has a 19.9 percent stake, is expected to raise HK$15 billion in a first-quarter IPO.

In the second half of the year, IPOs from the China Construction Bank and the Bank of China are expected to raise a respective HK$46 billion and HK$31 billion. The debt restructuring necessary for all these banks to list successfully is widely seen as the next major step in reforming the banking system ahead of liberalization in 2006. See full story.

That the IPO pipeline is so tentative shows how critical Hong Kong has become for Chinese companies looking to raise funds.

"There is mutual gain for Chinese companies and the Hong Kong stock market," HSBC's Leung said. "Hong Kong helps Chinese stocks gain attention and capital, while the Chinese give Hong Kong better marketability in the world."

"Next year should see at least the same amount raised from IPOs. It could be even larger if liquidity is higher in the region," he added.

Here are five Chinese IPOs to look out for in 2005, in order of expected proceeds:

China Construction Bank (HK$46 billion)
Bank of China (HK$31 billion)
Bank of Communications (HK$15 billion)
Shenhua Group (HK$11.5 billion)
Jianlong (HK$3.8 billion)