The Potential Impact of China’s Proposed New Forex Regime for Cornerstone Investment in Hong Kong IPOs

Cornerstone investors have been playing an increasingly dominant role in Hong Kong IPOs. In fact, PRC institutional investors in particular have demonstrated their strong appetite for cornerstone investment. As a case in point, the Postal Savings Bank IPO in 2016 saw state-owned enterprises (“SOEs”) such as China Shipbuilding Industry Corp. and State Grid Overseas Investment taking up over 75 percent of the HK$57.6 billion deal’s total offering.

PRC investors may be more active in Hong Kong IPO’s cornerstone tranche due to China’s proposed new forex regime for cornerstone investors. Currently, PRC institutional investors invest in Hong Kong IPOs under the Qualified Domestic Institutional Investor (“QDII”) scheme, which allows onshore investors to invest based on the QDII quota. However, going forward, onshore investors may be allowed to invest in Hong Kong IPOs by Chinese companies based on the forex quota subject to certain conditions, according to Guo Song of the State Administration of Foreign Exchange (“SAFE”). This includes repatriation by the issuers of a portion of the IPO proceeds and repatriation by the cornerstone investors of a portion of the sale proceeds after selling their investments. This suggests that the proposed new regime may be part of Chinese regulators’ wider efforts to boost China’s foreign exchange reserves and manage capital outflow.

While it is difficult to grasp the full implications of the proposed new regime until SAFE officially announces the relevant details, there has already been much discussion over whether it is a boon or bane to Hong Kong’s IPO landscape. On the one hand, it may encourage more mainland companies to list in Hong Kong by expanding the pool of potential cornerstone investors. On the other hand, issuers may not find the new regime attractive given the repatriation requirements, and identifying new investors and educating them about Hong Kong’s IPO regulations may take considerable time.

As the implementation details of the proposed new regime have not yet been officially announced, it remains to be seen whether the new arrangement is supposed to replace the current QDII regime or serve as an additional avenue for potential cornerstone investors to invest in Hong Kong IPOs.