Xiaomi’s blockbuster IPO risks leaving Hong Kong’s financial system with a cash crunch

Hosting what’s shaping up to be the world’s biggest initial public offering of 2018 may be a double-edged sword for Hong Kong.

Chinese smartphone maker Xiaomi is preparing a share sale that will raise at least US$10 billion, people familiar with the matter said. The city’s red-hot IPO market usually sees offerings oversubscribed -- sometimes by hundreds of times -- as investors borrow heavily to place orders.

When Ping An Good Doctor started taking orders from retail investors for its shares last week, the key interbank interest rate (Hibor) jumped by the most in nearly a decade. A higher Hibor rate affects the cost of everything from housing mortgages to corporate loans; and if everyone’s using their margin loans to subscribe for an IPO, that can mean less money sloshing around in the city’s US$5.6 trillion equity market.

“We could expect a very notable increase in Hibor if an IPO is very oversubscribed,” said Ronald Man, a strategist at Bank of America Merrill Lynch in Hong Kong.

Hong Kong interbank rates are already climbing after years at ultra-low levels as the city’s monetary authority buys local dollars to defend a currency peg, thereby sucking up liquidity. Beijing-based Xiaomi declined to comment on the IPO, which could be the largest worldwide since Chinese e-commerce giant Alibaba Group Holding raised US$25 billion in its 2014 debut in New York.