China Cornerstone Buyers Get Clearer Path to Hong Kong IPOs

(Bloomberg) -- The big Chinese investors who increasingly underpin Hong Kong initial public offerings now have a clearer path for moving their money across the border.

China's foreign-exchange regulator has refined the review process for domestic companies that want to make large investments in Hong Kong IPOs, people with knowledge of the matter said. The State Administration of Foreign Exchange has started asking Chinese investors to submit requests for approval if they want to buy substantial sums of Hong Kong currency for IPO investments in the city, according to the people, who asked not to be identified because the details are private. 

The regulator now has a dedicated review process for such applications, the people said. The move clarifies procedures for such Chinese investors to seek a green light to move funds offshore, after some previous deals went through ad-hoc review processes, the people said. 

Chinese cornerstone investors have become an increasingly important feature of Hong Kong's IPO landscape in recent years, with state-owned enterprises helping underpin demand in choppy markets. Listing candidates often set aside more than half their offerings for such investors, who get early access in return for holding their stakes for six months. This year, that's collided with Chinese government efforts to control fund outflows and reduce depreciation pressure on the yuan.

“If this is a new green channel, Hong Kong's IPO market will get a boost with the path smoothed for cornerstone investors,” Ronald Wan, chief executive of Partners Capital International Ltd. in Hong Kong, said by phone Tuesday. “We have yet to see its effect, as the move coincided with curbs on money outflows.”

Review Criteria

Hong Kong IPOs have raised $21.7 billion this year, down from $25.8 billion during the same period in 2015, according to data compiled by Bloomberg. The six Chinese lenders that went public in Hong Kong during the last 12 months relied on mainland Chinese cornerstone investors to buy an average 53 percent of their offerings, data compiled by Bloomberg show.

SAFE didn't immediately respond to a faxed request for comment.

While SAFE has begun seeking applications, there is no guarantee they will be approved, and the review criteria are unclear, the people said. As SAFE regulates cross-border fund flows, its approval would only be needed by Chinese investors that don't already have adequate funds parked offshore in a foreign currency.

Chinese officials and state-run media have stepped up efforts to curb yuan depreciation concerns, talking up the currency last week as it traded near the weakest level in six years. Renewed strength in the dollar has added to the stress.

Bank Delay

The nation's outbound yuan payments surged to a record in September, indicating greater pressures on the currency. While China has eased access to onshore bond markets and scrapped the need for quotas for an inbound investment program, it retains control of the currency mainly through a daily central bank reference rate that limits moves to 2 percent on either side.

Some previous Hong Kong IPO delays have been blamed on cornerstone investors having trouble getting their money across the border. In February, China Zheshang Bank Co. postponed gauging demand for its Hong Kong initial public offering after some potential cornerstone investors reported difficulty transferring money out of mainland China, people familiar with the matter said at the time. The stock buyers told Zheshang Bank they couldn't get timely approval to convert the funds, according to the people. 

SAFE said at the time it hadn't adjusted its policies on overseas securities investments. Zheshang Bank and its existing investors raised $1.9 billion from the offering, after selling stock to cornerstone buyers including state-owned Zhejiang Provincial Seaport Investment & Operation Group Co. and Chinese brokerage Shenwan Hongyuan Group Co., data compiled by Bloomberg show.

To contact Bloomberg News staff for this story: Fox Hu in Hong Kong at fhu7@bloomberg.net, Steven Yang in Beijing at kyang74@bloomberg.net. To contact the editors responsible for this story: Ben Scent at bscent@bloomberg.net, Richard Frost at rfrost4@bloomberg.net, Jessica Zhou at jzhou75@bloomberg.net, Timothy Sifert

With assistance from Fox Hu, Steven Yang