These days, all the talk about the mainland is about economic slowdown, corporate bankruptcies and tightening credit. Nevertheless, the Hong Kong and mainland primary markets are strong across asset types as onshore reforms push issuers offshore, much to the city's benefit.
Hong Kong had a big first quarter for initial public offerings, generating US$5.8 billion. That was half the amount of the previous quarter but a fivefold rise over last year, according to Thomson Reuters.
Two deals - Li Ka-shing's US$3.1 billion spin-off of Hongkong Electric and the US$1.1 billion float of Harbin Bank - dominated volumes. The outlook for the rest of the year in equity capital markets is interesting.
On the minus side, Hong Kong has lost giant listings in the form of e-commerce firm Alibaba and pharmacy chain AS Watson, which together would have raised about US$21 billion.
On the plus side, some big listings remained queued up for the year, not the least of which is WH Group, the Sino-US pork group formerly known as Shuanghui International. The issuer kicks off a pre-marketing campaign on Monday for a US$6 billion listing in Hong Kong.
Meanwhile, the city is facing the possibility that mainland parents may inject huge volumes of assets into red chips, followed by large equity fund-raisings. Citic Group is setting the template for such deals. It is injecting 225 billion yuan (HK$283 billion) of assets into Hong Kong-traded Citic Pacific, and this would require issuing at least HK$90 billion in new shares to maintain its minimum public float requirements.
This opens the possibility that other red chips will follow Citic Pacific's example and buy assets from their parent, paid for with a large share sale. This would be done to boost the transparency and governance of mainland firms, said Ben Kwong Man-bun, the chief operating officer of broker KGI Asia.
On the debt front, mainland and Hong Kong issuers raised US$23 billion in international markets, making it the third-largest quarter for such deals in five years. Mainland property firms were a big contributor, as usual, capturing US$5.3 billion of first-quarter bond volumes. Almost all the property bonds came in the first two months of 2014, with issuance grinding to a halt following this month's collapse of Zhejiang Xingrun Real Estate.
Dim sum bond issues doubled in the first quarter. That was a strong result, given that the yuan has lost more than a third of its gains made last year since Beijing widened the trading band of the currency on March 15.
David Yim, head of north Asia debt capital markets at Royal Bank of Scotland, said a lot of dim sum bonds issued three years ago were maturing. Investors are reinvesting in new bonds. The quality of deals is also improving, which keeps investors involved.
"The offshore market has developed over the past two to three years and we have not seen too many unrated small to medium-sized companies doing [offshore yuan] bonds recently. These covenant-light unrated high-yield deals have disappeared because investors demand more protection and currency appreciation is much less certain."
Moreover, as regulators tighten onshore liquidity, it makes sense for mainland firms to go offshore to raise debt. This could be seen in a series of US dollar bonds from mainland firms.
"The mainland's financial institutions have accessed the US dollar market after a prolonged period of absence … one could also relate this to the fact that liquidity has become more expensive onshore," said Alan Roch, head of Asia-Pacific bond syndicate at RBS.
This dynamic was apparent in offshore syndicated loan markets, which just had a record quarter for the volume of loans from mainland borrowers, said Phil Lipton, head of syndicated finance for Asia-Pacific at HSBC. The loan market is also an important alternative to the mainland's property firms now that they have temporarily lost access to the offshore bond market.
"We are seeing increased interest from property firms looking to tap the loan market," Lipton said. For the offshore market, the funding flow for Hong Kong and mainland issuers across all assets looks robust.