Hong Kong Looks For Yuan IPO Capability

by Mary Swire, LawAndTax-News.com, Hong Kong

12 October 2010

During a luncheon presentation at the Foreign Correspondents Club, Charles Li, Chief Executive of Hong Kong Exchanges and Clearing (HKEx), said that, as soon as next year, companies could be able to issue Chinese yuan-denominated shares through initial public offerings (IPOs) in the territory.

A move to allow stock issues in yuan, to be followed by equity derivatives and other products within another five years, would provide an additional outlet for offshore investors with funds deposited in the currency, in Hong Kong or elsewhere, following recent liberalization measures allowing interbank transfers, trade settlements in yuan, and yuan-based bonds and insurance policies.

Such investments might also provide the competitive returns that have been so far lacking in yuan-denominated products in other investment areas. Li disclosed that he is hoping that those equity products with more attractive yields would also encourage further trading in the yuan market, particularly through HKEx.

However, he was aware that the development of a yuan-denominated equity market would not happen overnight. There are various technical and regulatory barriers to overcome, and liquidity in the market would be a big problem. As in other markets, it would be the case of progressing on a gradual basis, continually demonstrating to the Chinese regulators that possible risks to the internal yuan market can be controlled.

Li was also bullish about Hong Kong’s future as an international centre for yuan-denominated products, in possible competition with Shanghai and other cities in China. He pointed out that Hong Kong is already an international financial centre, and one which allows China to test the market for new products in yuan, without any direct effect on its domestic financial market.

The proposal for yuan-denominated IPOs in Hong Kong was later supported by the former head of the Hong Kong Monetary Authority, Joseph Yam, especially because, he said, they would help to reduce the volatility of the Hong Kong dollar, caused by overseas investors transferring funds into the currency, and increase yuan liquidity.

In his opinion there is no fundamental reason why the Chinese authorities should object to IPOs denominated in yuan in Hong Kong. He noted, as had Li, that there is significant demand for attractive opportunities to invest the offshore yuan accumulating in Hong Kong deposits, and the territory is well-placed as the current innovator of financial products denominated in the Chinese currency.

Recommended