Hong Kong IPOs in Yuan Would Be an Unwanted Gift: Gadfly

HONG KONG, BLOOMBERG -- Just as a slew of desirable new-economy Chinese players look like they're coming to list in the city -- including perhaps Alibaba Group Holding Ltd. and its affiliate Ant Financial -- Beijing plans to allow yuan-denominated IPOs for companies involved in its signature Belt and Road initiative.

The travails of billionaire Li Ka-shing's Hui Xian Real Estate Investment Trust are reason enough to avoid a yuan IPO. Floated in April 2011, Hui Xian is the owner of Beijing's Oriental Plaza mall and was Hong Kong's only initial offering in the Chinese currency. The REIT is trading 40 percent below the 5.24-yuan offer price, having moved mainly in tandem with the managed yuan.

The only other yuan-denominated stock in the city is Hopewell Highway Infrastructure Ltd., which had a secondary offer in the Chinese currency in 2012, following its 2003 Hong Kong dollar IPO. The stock struggled until a couple of years ago, and the family that controls it recently sold a chunk to the Shenzhen municipal government.

Now, with the People's Bank of China reducing one pillar of support for the currency by tweaking its management of the daily fixing, the sustainability of the recent rebound is less assured. As my colleague Shuli Ren wrote this week, the yuan is nowhere close to toppling the greenback as the world's reserve currency.

There's also a lot less idle yuan sitting in Hong Kong deposits awaiting better opportunities than hitherto. The Hui Xian REIT and Hopewell Highway went public when the Chinese currency was seen as a one-way bet, and Hong Kong residents were boosting their yuan savings. Back then, companies raising funds saw yuan IPOs as a way of tapping that pool.

Even if IPOs in the Chinese currency are a good idea, it's questionable whether Belt and Road companies really are a commercial proposition.

While Chinese banks are happy to lend to President Xi Jinping's campaign for an updated Silk Road linking China with Asia, Europe and Africa, the economic rationale behind many of the projects isn't always clear. Sri Lanka's Mattala Rajapaksa International Airport, funded by China, has barely any passengers -- one example of how Belt and Road, also called OBOR, could deliver white elephants.

Something to avoid

White elephants

It's not as if infrastructure companies have any trouble listing in Hong Kong. They can skip the mandatory three-year profit track record, for one thing -- an exemption otherwise open only to big companies or (soon) those in biotech. Last year, regulators said they would be even more flexible in approving OBOR companies. Investors will not only have to contend with projects that aren't always commercially viable, but with companies that are less regulated.

Anyway, who knows what a Belt and Road company really is? Even the Shenzhen Stock Exchange's once-vaunted link with its Philippine counterpart has been billed as part of the OBOR agenda, suggesting yuan IPOs might come from beyond infrastructure developers. The China Daily report quoted Zhang Xiaoqiang, vice chairman of the China Center for International Economic Exchanges, as saying the government will pick listing candidates.

With the city easing up on dual-class rules and profit requirements to lure tech stocks, the once-staid Hong Kong exchange is getting a lot sexier. OBOR IPOs in yuan would be interesting, too. Just not necessarily in a good way.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.