Hong Kong needs to make the case for dual currency IPOs
The list of potential issuers looking to pursue a dual currency IPO in Hong Kong just keeps getting longer. Hong Kong Airlines is the latest said to be interested in a listing in Hong Kong dollars and RMB. But the fact that no firms have ever gone through with the idea makes it clear that the market is not buying into the innovation.
Chow Tai Fook, Sun Art Retail, Haitong Securities and WH Group: what do a jewellery firm, a supermarket operator, a broker and a pork producer have in common? Answer: they are all companies to have shown an interest in conducting a dual currency IPO in Hong Kong ever since the city’s regulator introduced the structure in 2011.
Unfortunately, there has still been no such deal.
That lack is definitely not down to a lack of effort on the part of the Hong Kong Stock Exchange (HKEx), which has long been pushing to bankers and companies the benefits of dual currency IPOs. Its argument is simple: a dual currency IPO enables companies with RMB needs to bring the proceeds onshore directly. No currency swapping is needed, reducing a company's costs.
Issuers can also benefit from a more diversified investor base and, with that, better demand for their shares as they are tapping into two different pools of liquidity for funding.
The other point, of course, is that these deals will strengthen Hong Kong’s position as a premium offshore RMB hub — or at least that is what the HKEx is hoping.
The theory seems sound enough, but the HKEx is forgetting the inconvenient law of supply and demand. Issuers obviously play an important role in capital markets transactions, but you can’t sell an unwanted product. And in its current form, it is hard to see why investors would be interested in a dual currency IPO.
Investors have long complained about the relatively low trading volumes of Hong Kong stocks compared to the likes of Japan and the US. Splitting a deal into two currencies would only reduce that liquidity further. An illiquid stock is definitely not high on any investor’s shopping list.
In addition, most established institutional investors already have QFII quotas and so can buy directly from the A-share market. That is far easier than going through all the technicalities that are bound to arise from any structural innovations.
Then there is also the issue of a weakening RMB, which has lost 2.5% against the US dollar since the start of the year. While it makes financial sense for investors to invest in RMB when the currency is appreciating, that doesn't look quite such an appealing bet now. The Hong Kong dollar, conveniently pegged to the US dollar, is much more straightforward.
None of this means that Hong Kong is wrong to try to promote dual currency listings, given the instability on China's A-share IPO market. Even though th at market reopened in late 2013 after a year-long moratorium, the waiting list for deals remains long. Some 100 are slated to list by the end of the year, but that means there are around 600 still looking for funding. Many of those will doubtless never see the light of day, but many will look to Hong Kong to help them tap investors.
Pursuing some of the most cash-hungry firms to list in Hong Kong should not be too much of a problem — having waited for an average of three years, many are already extremely impatient.
The problem lies with getting the buyside interested. It takes two hands to clap and some have suggested that perhaps a good old monetary incentive ought to do the trick. Whatever the answer, if the exchange is serious about promoting dual currency deals, it needs to show investors it is addressing the question of why they should buy.