China’s crackdown on money leaving the country is making it harder for mainland companies and individuals to funnel money into Hong Kong IPOs – which is no bad thing.
Mainlanders have not always focused on the pricing of IPOs, but rather their broader relationship with the listing candidate. This has earned them the moniker ‘friends and family’ investors.
This practice has often resulted in poor performance and a lack of liquidity in the stocks’ aftermarket, analysis by data provider Dealogic and FinanceAsia shows.
This is no small matter, given Hong Kong is the biggest IPO venue in the world year-to-date.
In the past, if global investors thought a Hong Kong IPO was overpriced the deal failed; nowadays the listing lives on using mainland money as a crutch.
Mainlanders have been heavily using Hong Kong’s unusual system of so-called cornerstones to buy in before the launch of an IPO.
So far this year, cornerstones have accounted for 40% of IPOs, the largest ever share for the period. Last year, cornerstones also propped up IPOs in record volumes, according to Dealogic.
This unhealthy system has survived, in part, because advisers fiercely compete for lucrative IPO fees and have not held the line on preventing overpriced deals hitting the market. The Hong Kong bourse also benefits from garnishing listing fees.
It took a crackdown by China’s regulators, who were seeking to alleviate pressure on the renminbi earlier this year, to put pressure on this cosy arrangement. The price of using China’s Qualified Domestic Institutional Investor scheme to shift money offshore has risen sharply, market sources say.
To be sure, many mainland companies have cash offshore from overseas operations or proceeds from bond issues they can still invest in IPOs.
However, financial practitioners should not wait for regulators to take further action before acting to help return pricing discipline to Hong Kong IPOs.
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