Ex-HKEX CEO's Chapter 21 Listing: A Catalyst for SME Funding in Asia?

The Hong Kong Stock Exchange's (HKEX) Chapter 21 listing framework, dormant for over a decade, has resurfaced as a potential game-changer for small and medium enterprises (SMEs) seeking capital in Asia. At the heart of this revival is Micro Connect International Finance (MCIF), an initiative led by Charles Li Xiaojia, the former HKEX CEO. MCIF's bold move to list under Chapter 21—a mechanism historically reserved for investment companies targeting institutional investors—has sparked debates about its ability to democratize access to capital for SMEs. This article explores whether Li's strategic pivot could redefine how Asian SMEs secure funding, while also probing its implications for capital allocation efficiency and institutional investor sentiment.

The Chapter 21 Framework: A Niche Opportunity Reborn

HKEX's Chapter 21, introduced in 1989, allows companies to bypass traditional financial benchmarks like profit or revenue in favor of thematic clarity and institutional investor backing. To qualify, a firm must raise at least HK$150 million from 300 qualified institutional investors, each committing a minimum of HK$500,000. Despite its potential, only 21 firms have ever utilized it, with the last listing occurring in 2011—the China New Economy Fund.

MCIF's 2025 listing marks a revival of this framework. By targeting SMEs' cash-flow-based assets—such as receivables or revenue streams—MCIF aims to channel institutional capital into businesses that traditional markets often overlook. This structure could de-risk SME financing by aligning investor returns with real-time cash flows, a stark contrast to conventional loans or equity stakes.

MCIF's Strategic Play: Bridging Gaps in SME Financing

MCIF's model hinges on three pillars:
1. Thematic Clarity: Focused on sectors like technology, healthcare, and green energy, it promises investors exposure to high-growth SMEs without requiring prior profitability.
2. Institutional Accessibility: By leveraging Chapter 21's institutional investor base, MCIF aims to attract global capital, including from Asian pension funds and sovereign wealth funds.
3. Regulatory Leverage: Li's deep understanding of HKEX's rules ensures compliance, while the listing's “Yield In, Term Out” structure—a feature of its Cashflow Contingent Obligations (CCOs)—offers flexibility for SMEs to repay based on actual cash flows.

Data: MCIF's Series C (2023) raised $458M, valuing the firm at $1.7B. A subsequent 2024 round led by Jane Street Corporation further solidified institutional confidence.

Impact on Capital Allocation Efficiency

If successful, MCIF's model could mobilize dormant capital for SMEs, particularly in China, where over 40 million SMEs contribute 60% of GDP but face funding gaps due to collateral requirements or asymmetric information. By enabling SMEs to monetize cash flows rather than equity, MCIF reduces dilution risks and opens doors for businesses in informal sectors.

For institutional investors, MCIF offers a new asset class: daily revenue obligations (DROs) tied to SME cash flows, which could diversify portfolios and align with ESG goals. This could also pressure traditional lenders to innovate, fostering a more competitive financing ecosystem.

Institutional Sentiment: Hype vs. Reality

While the concept is compelling, skepticism lingers. Key concerns include:
- Regulatory Acceptance: Will regulators view MCIF's “cash flow sharing” as transparent, or will it face scrutiny over valuation and risk disclosure?
- Competing Mechanisms: HKEX's existing Bond Connect and Stock Connect programs already facilitate cross-border flows. Can MCIF carve a unique niche?
- SME Readiness: Many SMEs lack the operational rigor to provide real-time cash flow data, a prerequisite for MCIF's model.

Early signals are mixed. PHDCCI's Q4 2025 SME sentiment survey shows 67% of Indian SMEs expect growth, but only 53% plan capital expenditure, suggesting lingering caution. Meanwhile, global private equity firms, though bullish on Asia's infrastructure and tech sectors, remain selective about SMEs due to liquidity risks.

Broader Implications for HKEX and Asia

MCIF's success could position HKEX as a pioneer in SME-focused listings, reinforcing its role as Asia's gateway for capital. By unlocking SME potential, it might also boost regional trade finance, as SMEs form the backbone of supply chains. However, HKEX must ensure MCIF's model doesn't crowd out traditional IPOs or dilute investor trust in its regulatory oversight.

Challenges Ahead: Risks and Uncertainties

• Execution Risk: MCIF's reliance on third-party data partners (e.g., payment aggregators) to source SME cash flows introduces operational complexity.
• Geopolitical Headwinds: Trade tensions, such as those highlighted in the CREFC's 1Q 2025 report, could disrupt SME supply chains and investor confidence.
• Market Liquidity: Without consistent trading volumes, MCIF's securities risk becoming illiquid, deterring institutional investors.

Investment Considerations

For institutional investors, MCIF offers a high-risk, high-reward proposition:
- Upside: First-mover access to an underserved SME market, with potential yield advantages over bonds or equities.
- Downside: Regulatory pushback, operational missteps, or SME defaults could derail the model.

Individual investors should proceed with caution. MCIF's structure may not be suitable for retail investors lacking the expertise to assess SME cash flows. Instead, focus on indirect exposure via funds or ETFs with exposure to HKEX's innovation ecosystem.

Conclusion: A Catalyst, But Not a Panacea

MCIF's revival of Chapter 21 is a strategic masterstroke that could reshape SME financing in Asia. By targeting institutional capital and leveraging Li's regulatory acumen, it addresses a critical gap in capital markets. However, its success hinges on execution, regulatory buy-in, and SME preparedness. For investors, it's a bet on both innovation and patience—a theme that defines Asia's evolving financial landscape.

Context: HKEX's dominance in Asian listings positions it to capitalize on MCIF's model, but it must balance innovation with stability.

In the end, MCIF's experiment may not be a silver bullet for SMEs. Yet, by testing the boundaries of what capital markets can do, it could ignite a wave of creativity—and redefine how growth is funded in Asia.

Investment advice: Monitor MCIF's post-listing performance and regulatory feedback before committing capital. Prioritize diversification and risk management.