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Friday, 19 July 2019

Slow progress

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Efforts to introduce renminbi-denominated shares in Hong Kong and Singapore have been on the backburner in recent months. However, market participants believe the foundations laid in the past six months will allow offshore renminbi stocks to take off in time.

A foreign worker directs traffic along a busy construction site in Singapore.

Source: Reuters/Edgar Su

A foreign worker directs traffic along a busy construction site in Singapore.

Hong Kong and Singapore, the biggest rivals in Asia’s equity markets, have extended their competition to the offshore renminbi market. Each has launched, or attempted to launch, equity products in their markets in the Chinese currency.

A year and a half after the listing of Hui Xian REIT, the first renminbi-denominated IPO in Hong Kong, the city saw another pioneering renminbi equity offering last October, when Hopewell Highway Infrastructure, a Hong Kong-listed operator of Chinese toll roads, completed a Rmb386.4m (US$61.3m) share placement.

The deal, which generated hot demand, was the first offshore renminbi-denominated follow-on offering, which also made HHI the first dual-counter stock in Hong Kong.

At more or less the same time, Singapore was about to introduce the first equity deal with a renminbi tranche – the S$829.2m (US$674.2m) dual-currency IPO of Dynasty REIT.

Although cancelled in the end for lack of demand, the deal set a template for similar offerings in the future, proving that the technical challenges behind a renminbi listing can be overcome.

Gradual development

HHI’s renminbi share placement and Dynasty REIT’s attempted dual-currency IPO have lifted hopes among some market participants that it is only a matter of time before Asia’s renminbi equity markets take off.

“Hong Kong has gathered a group of retail, as well as institutional, investors, who are holding plentiful renminbi deposits and looking for good returns. The investors are mature and understand renminbi equity products well. It’s just a matter of time before we see a more developed and diversified renminbi equity market,” said Joseph Chan, managing director, co-head of equity capital markets and head of ECM syndicate at BOC International.

“Our clients have interest in renminbi share issuance and they have inquired about it from time to time. We hope there will be more renminbi equity products in the market and we expect some breakthrough this year,” said Ambrose Lee, managing director and head of BOCI’s Hong Kong coverage team.

BOCI worked on the IPO of Hui Xian REIT and was also the sole bookrunner on HHI’s placement.

Indeed, with the renminbi continuing to appreciate, a handful of small Chinese companies are understood to be considering Hong Kong dollar and renminbi dual-currency floats in Hong Kong.

They include supply chain management services provider Shenzhen Trade Link Supply Chain Management, air-conditioning refrigerants producer Meilan International, power electronics manufacturer China Smart Electric Group and jewellery maker and seller Shenzhen Shuibei Jewelry. The sizes of the transactions are spoken of at around US$100m. The first, likely to be the float of Shuibei Jewelry, may hit the market as early as June.

Obstacles

Still, there are obstacles in the development of the offshore renminbi markets, the key one being the lack of interested and suitable issuers.

A renminbi IPO may not be suitable for every company, while the benefits for the listed entities to issue renminbi shares are also far from clear.

“Companies, whose revenue or costs are in renminbi, or with a business development plan on the mainland, would be the most suitable candidates. Ideally, they better have a sizable market capitalisation,” said Ambrose Lee.

In current market conditions, the most suitable issuers are also likely to be yield plays.

“Investors holding renminbi are often retail or conservative ones, who tend to be risk adverse. They want to achieve stable returns through the currency appreciation and, hence, tend to go for fixed income, but not equity products. That’s why the IPO of Hui Xian REIT and the share placement of HHI worked,” said an ECM banker at a foreign bank.

Hong Kong has the world’s biggest pool of renminbi deposits outside China. As at end-March, the renminbi deposit in Hong Kong stood at Rmb668.1bn, according to the Hong Kong Monetary Authority.

Still, from the investors’ viewpoint, liquidity is a key concern. For the dual-tranche candidates, a US$100m-share sale, with only part in renminbi, is too small to generate the liquidity needed to move the market forward.

Also, expected currency appreciation may already be reflected in the share prices of some listed Chinese issuers. Therefore, there is no need for investors to buy renminbi-denominated shares for the potential currency appreciation of 3%–5% a year.

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