On July 27 the Shanghai Composite Index slid by 8.5% amid disappointing manufacturing data and fears the government was scaling back on its market support measures, which first helped rescue A-shares from the brink at the beginning of July.
Although China’s indices have steadied, investors were not spared another rocky ride this week. As GlobalCapital Asia went to press on Thursday, the Shanghai Composite fell 2.2%, pulling Hong Kong’s benchmark Hang Seng Index down by 0.5%.
“My sense is that things will get more stable from here,” said a head of Asia ECM at a global bank. “This drop will test the government’s resolve. The question is whether the measures China had deployed to prop up the market were sufficient.”
The rout rattled ECM desks in Hong Kong, but bankers say that in times like these it is comforting to know they can count on what has become a reliable, and extremely receptive, audience for share sales in Hong Kong: mainland investors.
“The volatility in China is pushing more Chinese investors to park their money in Hong Kong ECM deals, because the market is more stable and sophisticated,” said a banker with a bulge bracket firm in Hong Kong. “They will come here by any means possible.”
Two recent deals illustrate this trend. Central China Securities Co sold shares on July 24 to mostly Chinese investors, while China Railway Signal & Communication Corp’s (CRSC) HK$14.0bn ($1.8bn) IPO had a cornerstone list heavily populated by mainland names.
And their ever-growing presence is crowding out international investors, say market participants. If in the past they made up 10% of the investor base, mainland investors can buy up entire deals now, but bankers say this varies from deal to deal.
“It helps that foreigners are being cautious and retreating from China because they can’t stomach the volatility,” said the head of Asia ECM. “Chinese investors are growing more forceful and they are willing to commit bigger ticket sizes.”
Not just SOEs
Although many Chinese investors in IPOs or blocks in Hong Kong still bear the mark of state ownership, their profile has changed over the years. Instead of just state-owned enterprises, bankers say more institutions and family offices are taking up the mantle.
A number of them even have a better understanding of the local market than the international investors, said the head of ECM. “Some of them have a long-term horizon and come in as strategic investors,” he pointed. “Not all are just in it for a trade.”
And as valuations in China and Hong Kong diverge many have resorted to dumping A-shares to get into H-shares, said a banker with a Chinese bank. “They are not as price sensitive and prefer to play it straight, meaning less hedging and derivatives transactions.”
One Hong Kong-based ECM lawyer put it this way: “If you are an underwriter would you rather go to 10 people, or just one Chinese investor whom you know will swallow the entire trade himself? It’s a lot easier to sell to these guys, and that’s the truth.”
It’s not difficult to see how mainland investors will continue edging out the global firms. “They (Chinese funds) don’t have all the bureaucracy of an international institution and don’t need a month to get various approvals from investment committees,” the lawyer added.
A source said he knew of at least one ECM transaction executed in the past six months that had finished bookbuilding and priced, before a Chinese buyer swooped in at the last minute and offered a higher price, causing some international funds to lose out on the trade.
Opportunities galore
Bankers flag downsides to this trend, however. “Unless there is a strategic angle to the investment and it enhances the equity story, it is negative. For instance, with CRSC, some of the cornerstones, which I shall not name, don’t validate the story.”
Jeffrey Mak, a Hong Kong-based partner with law firm DLA Piper, noted that two key reasons mainland investors are looking offshore was that China is opening up its capital accounts and loosening restrictions for outbound investment.
“It’s not solely about returns,” he said. “Chinese investors also come to Hong Kong because it is a much more diversified market and it allows them to hedge their exposure to Asia and invest, for example, in currencies or products which wouldn’t be available to them onshore.”
For now, issuers in Hong Kong are not showing any angst at the fact that mainland investors could be mopping up the majority of their share sales, say market participants. “The biggest thing on their [issuers'] mind is pricing and valuation,” the source said.