The first ever offshore initial public offering (IPO) denominated in China’s currency, the Renminbi (Rmb) was launched last week, to mixed success. The Hui Xian real estate investment trust (Reit) raised just $1.6 billion after being priced at the bottom of the range.
Well covered by institutional investors, it was met with a mix of caution and indifference by Hong Kong’s gambling-mad retail investor base.
Bankers from the three underwriters, Bank of China International, Citic Securities and HSBC, said the retail segment, which at 20% was double the normal size, was only 2.2 times covered, well below expectations.
Many retail investors were confused by the structure of the Reit – despite being priced in Rmb, local investors could only secure margin financing on the deal in the local currency, the Hong Kong dollar.
Underwriters were doubly disappointed when the Reit opened under water, its stock dropping 9% on the first day of trading, raising questions about the strength of the Renminbi, also called the yuan, as an offshore equity play.
Yet Hui Xian’s first-day blues were cast aside yesterday, when the Reit’s stock gained 5% after heavy institutional buying. “It’s a landmark transaction and they are always going to be tough,” said the lead arranger at one of the underwriters in Hong Kong.
“It wasn’t the easiest deal to do but then trailblazing deals rarely are,” he added. “The fact that we are now seeing investors coming into the secondary market so early is something we hadn’t expected. It suggests there is depth and liquidity in this market and it bodes well.”
The Hui Xian Reit also marks the next stage in the development of the Rmb as an offshore currency.
China in recent months has heavily promoted the use of its currency overseas. Capital controls are strictly enforced at home but the offshore Rmb market grows apace.
This year, 7% of Chinese exports will be paid for in yuan by mainland corporations. Emerging markets lender Standard Chartered sees that figure growing to one-quarter of all Chinese imports by 2015.
Michael Buchanan, managing director, global economics, commodities and strategy research at Goldman Sachs, told Emerging Markets that the development of the offshore Rmb market has been “phenomenal”. The yuan, Buchanan notes, has gone from “utter irrelevance” to a substantial chunk of the Hong Kong monetary supply (the high single digits) within a year.
And in recent months, a slew of so-called “panda” or “dim sum” bonds – debt issued in Rmb, mostly in Hong Kong by companies from Chinese battery maker BYD to global fast-food giant McDonald’s – have hit the markets.