China has made it mandatory for mainland cornerstone investors in Hong Kong initial public offerings to repatriate funds when they sell their shares, a rule likely to hit smaller, cornerstone-reliant listings, Reuters reports, citing people with knowledge of the matter.
The State Administration of Foreign Exchange (SAFE) has informed investment bankers and lawyers of the rule, borne out of government concern that cornerstone investment allowed large amounts of funds to leave the country and contribute to a decline in the value of the yuan, the people said.
Prospective cornerstone investors in Hong Kong IPOs of mainland firms now have to inform Chinese regulators of their intentions and promise to return funds to the mainland whenever they sell holdings, the people said.
“What the regulator is basically saying is that they won’t let the non-serious Chinese investors exploit the cornerstone route to take capital out of the country and park it offshore,” said one of the people.
Cornerstone investors are usually institutions that agree to buy a large proportion of shares sold through an IPO, which they are bound to hold for at least six months. Such investors dominate in Hong Kong to an extent unseen in other countries.
China’s new cornerstone rule comes as Hong Kong braces for a high number of potential IPOs spurred by a 10 percent rise this year in its benchmark share index – the best performer among major Asian stock markets.
The rule could make IPOs more difficult for small and mid-sized listing hopefuls, as well as firms that would struggle to attract foreign investors, which often fall back on “friendly” funds and wealthy individuals in China, the people said.
“Regulators are not outrightly restricting outbound capital flows per se, but they are certainly trying to clamp down on methods that are less visible and manageable,” said Jonathan Ha, chief executive of Shanghai-based markets researcher Red Pulse.
“The likely impact of this new policy is a moderation of demand for investment into these IPOs, without necessarily a bias based on smaller versus larger IPOs.”
Last year, the 10 biggest listings of Chinese firms in Hong Kong saw cornerstone investors – nearly all mainland entities – buying 50 percent to as much as 78 percent of shares on offer, Reuters calculations showed.
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