No takers for yuan IPOs amid fears and options
A year has passed since the city's stock exchange operator rolled out its guideline for firms to issue yuan-denominated shares, but there still aren't any takers for what was then seen as a game-changer.
Last June, Hong Kong Exchanges and Clearing (HKEx) introduced the so-called dual-option model.
Under the model, listing candidates would be allowed to sell shares denominated solely in yuan as well as in the currency and the Hong Kong dollar.
Apart from new IPO firms, listed firms would be allowed to issue new shares denominated in yuan via private share placements or right issues.
But a year on, no company has taken the yuan IPO route.
The closest the city came to a yuan listing was the listing in April last year of Hui Xian Real Estate Investment Trust, which is not considered a company.
Jojo Choy Sze-chung, chairman of the Institute of Securities Dealers, says it's all about timing. 'Brokers are ready. What we need is the right time,' he said.
And things have been anything but right. Louis Tse Ming-kwong, director of VC Brokerage, said market sentiment was too weak to support any share offering.
'We have seen many IPO plans shelved recently,' Tse said. 'In addition, investors who want to bet on the yuan's appreciation also have a lot of other options such as yuan insurance, yuan funds and yuan bonds.
'Likewise, firms that want to raise funds in yuan in Hong Kong can also issue dim sum bonds or yuan loans, which are easier to arrange than yuan shares.'
There are concerns about repatriation as well. Angelina Kwan, executive managing director of Reorient Financial Markets, says there are firms interested in issuing yuan shares, but they are uncertain about whether they could repatriate them to the mainland.
'Even though the mainland now allows firms to use yuan instead of the US dollar for foreign direct investments, firms would still need to seek the approval of many different departments on the mainland before they can repatriate their funds to the mainland, or they may need to find alternative means of moving such funds to the mainland,' said Kwan.
'Such uncertainties have made firms reluctant to issue yuan shares.'
Brett McGonegal, Reorient's chief executive, said institutional investors did not have much yuan on hand, which would make it hard for them to invest in yuan shares.
Institutional investors also worry that yuan shares would lack liquidity in secondary-market trading.
'Institutions want yuan exposure, but they have to balance their investment strategies against the risk factors, which, in this case, would be the lack of secondary-market liquidity,' McGonegal said.
'Many retail investors hold yuan deposits or yuan bonds for the long term as a way of betting on appreciation, but seldom dabble in the secondary market.
'If that attitude is carried over to yuan shares, there might not be a lot of secondary liquidity in that market. This makes institutional investors wary of yuan shares.'
The yuan has not been allowed to become a fully convertible global currency, but since mid-2009 Beijing has gradually liberalised the currency for use in trade settlement and for investment purposes.
Many yuan products - such as insurance, investment funds and bonds - have been popular with investors due to the potential of currency gains.
The yuan has risen by nearly 30 per cent since 2004. But expectations of further strengthening have eased since late last year as yuan deposits in the city have been declining over the past five months and yuan investment products have been losing their allure.
Mark McCombe, BlackRock's Asia-Pacific chairman, said the decline in yuan deposits could further hurt sales of yuan insurance products. He also said the yuan's uncertain outlook might hurt the appeal of dim sum bonds.
IPO deal volumes in Hong Kong have fallen this much in the first five months of the year from last year