Hong Kong’s yuan IPO buyers should heed history

April 26, 2011

By Wei Gu
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

HONG KONG — China likes financial experiments, but they don’t all end in success. The latest yuan innovation may be one of them. Hong Kong’s launch of stocks priced and paid for in the mainland currency, starting with real estate trust Hui Xian, recalls the forgotten “B-share” market, where foreigners could invest directly in mainland stocks. As investors get ready to punt on Hui Xian and its yuan-denominated followers, they should heed history.

Stock markets in Greater China already look like an alphabet soup. The majority of stocks are so-called A-shares, some 2,000 companies traded in Shanghai and Shenzhen in the Chinese currency. Then there are B-shares, some 106 Chinese company stocks denominated in dollars and Hong Kong dollars. Since that market was launched in 1992 there have also been H-shares, Chinese companies traded in Hong Kong, and now the new yuan-denominated stocks — let’s call them Y-shares.

While A- and H-shares have thrived, the B-share market has withered. There have been no new stocks launched since 2000, and B-shares trade at an average 55 percent discount to their A-share peers. The main reason is a lack of liquidity. Investors and issuers moved on when better alternatives came along. Chinese companies started raising money in Hong Kong and the United States. International investors can also now buy A-shares within a quota system.

Y-shares, which will start trading in Hong Kong shortly, look more B than H. Yuan deposits in Hong Kong have ballooned to $62 billion, but are scant compared with Hong Kong dollars. A few big names may attract both investors and yuan deposits. But big issuers will normally want to be priced in the most liquid currency. Bankers say most candidates for the new Y-shares are unexciting mainland property trusts. Hui Xian already priced at the low end of the indicative pricing range.

If China opened its borders to capital flows, liquidity would increase dramatically. But for yuan stocks in Hong Kong, that creates another problem. Once foreigners get full access to mainland markets, there will be little reason to buy yuan stocks in Hong Kong. China’s home market is likely to have the broadest selection of companies. So whichever direction the country takes, Hong Kong’s Y-shares are unlikely to get very far.

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