Chinese companies looking for a yuan-denominated listing in Hong Kong are getting mixed messages.
On one hand, Hong Kong officials are keen on developing the nascent yuan business. On the flip side, however, the city's pool of investible yuan is insufficient to generate a meaningful institutional investor base. The result has been spotty deal flow and limited investor interest as indicated by poor turnover in the secondary market.
Moreover, there are few commercial incentives for issuers to sell shares denominated in yuan unless they have a patriotic reason to do so. Consider the lack of meaningful yuan issuance by Hui Xian Real Estate Investment Trust and Hopewell Highway Infrastructure, which initially traded mixed but which fell below their offer prices in the months after their listings.
Adding to the woes facing these stocks, many institutional and retail investors adopt the "buy-and-hold" approach in the expectation of yuan appreciation, which means reduced trade and liquidity.
To some degree, the fate of yuan-denominated stocks is similar to that of the yuan-denominated bond market in Hong Kong, which has suffered amid concerns over currency convertibility.
One mainland economist last year flagged up concerns over the approach for liberalising the mainland's currency, highlighting what appears to be stumbling blocks ahead.
"Before the internationalisation of the yuan can make meaningful progress, necessary conditions, such as the existence of deep and liquid financial markets, a flexible exchange rate and interest rates responsive to market conditions must be created, " said former People's Bank of China monetary committee member Yu Yongding.
Yu cautioned that the plans as laid out may even be counter-productive.
"The PRC's road map for the internationalisation of the yuan is flawed with many missing links and wishful thinking," he said.
Meanwhile, bankers said major firms taking advantage of opportunities available with yuan-denominated products would be a much-needed shot in the arm.
"In the absence of blue chips issuing the renminbi equity products, the market can barely take off in the foreseeable future," said one senior banker with a US investment bank.
He added that yuan listings could follow the doomed path of the ill-fated Growth Enterprises Market board, an alternative fundraising platform aimed at start-up companies, which eventually proved to be unsuccessful.
Still, there's some hope yet that things could spring back to life.
Shuibei Jewellery, a mainland retailer, is preparing to raise as much as 500 million yuan (HK$628.26 million) in what could be Hong Kong's first initial public offering to raise both yuan and Hong Kong dollars in one tranche of shares.
The Shenzhen firm submitted a listing application to the Hong Kong stock exchange earlier this year and is preparing to attend a listing hearing, according to people involved in the deal.
Yuan deposits in Hong Kong rose to 603 billion yuan last year, the bulk of which are used for working capital purposes.