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Yuan IPOs Are Beijing's Next Export for Hong Kong Exchange CEO Charles Li

Charles Li, who helped lead China’s first international bond sale in New York 16 years ago, now plans to bring the initial offerings of yuan-denominated shares to investors outside the world’s second-biggest economy.

Li, the chief executive officer of Hong Kong Exchanges & Clearing Ltd., has proposed allowing Chinese companies to sell yuan-priced stock in Hong Kong, where investors are free from the quotas imposed by Beijing on foreign ownership of mainland equities. No shares in the currency, also known as the renminbi, trade outside the country.

For the former oil-rig worker and editor of the government- run China Daily newspaper, the initiative would bring more listings to his exchange from a country where 422 billion yuan ($64 billion) has been raised in initial public offerings this year, three times as much as in the U.S., data compiled by Bloomberg show. Li, a 49-year-old Chinese citizen, would make Hong Kong a more important gateway as the Beijing government takes steps to open its markets to international investors.

“Charles is pushing for the interests of both Hong Kong and Beijing,” said Frank Song, director of the Centre for China Financial Research at the University of Hong Kong. “China isn’t ready to fully open its financial system. It is taking a structured, limited approach and Hong Kong can play a very important role in that.”

Exchange Renminbi

The world’s most populous country prohibits citizens from sending yuan outside China, limiting funds available for an offshore IPO to money already in circulation. Li has suggested asking the Beijing government and People’s Bank of China to allow financial institutions to exchange renminbi for investing in a new class of yuan-denominated offerings in Hong Kong, he wrote in a Sept. 21 article on the exchange’s website. Li declined to comment.

Li has made a career modernizing China’s financial system. After graduating from Columbia University in New York, he worked with Manhattan law firm Brown & Wood representing China’s Ministry of Finance on a $1 billion global bond sale in 1994.

The lead underwriter, Merrill Lynch & Co., hired Li in 1994 and appointed him China president in 1999 to oversee Hong Kong listings. Li joined JPMorgan Chase & Co. in 2003, and was Beijing-based China chairman before moving to Hong Kong Exchanges in January. He spent his first day as CEO in Beijing, according to Henry Law, an exchange spokesman.

“Having Charles Li in this position isn’t a coincidence,” said Kenny Tang, executive director at Redford Asset Management Ltd. in Hong Kong. “That Hong Kong Exchanges’ board appointed a person who has such a combination of background and experience exemplifies its goal, which is to align itself with China.”

Hong Kong Stocks

The largest publicly traded exchange operator in the world by market value is home to Hong Kong stocks such as HSBC Holdings Plc, the third-biggest bank, international clothier Esprit Holdings Ltd. and Hutchison Whampoa Ltd., the telecommunications and energy company controlled by Li Ka-Shing. Mainland stocks accounted for 46 percent of the HK$20.64 trillion ($2.66 trillion) capitalization of Hong Kong’s Main Board at the end of October, exchange data shows, up from 16 percent in 1997, when the U.K. returned Hong Kong to China.

Under one of Li’s proposals for allowing yuan stock sales, investors holding renminbi could buy and sell shares directly in Hong Kong. Those coming to the market with another currency could trade through local brokers, who would convert the value of the shares back into foreign currency when the investor sold. This way, the market would retain enough yuan for shares to trade, Li wrote in the September article.

Yuan Deposits

Li’s proposal is part of a process that began in February 2004, when yuan deposits were first allowed in Hong Kong. They have more than doubled to $22 billion in the last six months, the Hong Kong Monetary Authority said Oct. 29.

The People’s Bank of China and Hong Kong’s central bank reached an agreement on July 19 removing limits on transfers of yuan among banks in the city. Regulators agreed Hong Kong would have no restrictions on yuan deposit holders using renminbi to buy wealth management products, an action aimed at developing a market for the currency in Hong Kong, HKMA Chief Executive Norman Chan said.

Chinese companies now issue renminbi-denominated bonds in Hong Kong. The value of all transactions settled in the currency rose 160 percent during the third quarter, the PBOC said on Nov. 2. Espoo, Finland-based mobile-phone maker Nokia Oyj, retailer Metro AG in Duesseldorf, Germany, and McDonald’s Corp. in Oak Brook, Illinois, the biggest restaurant chain, were among companies that settled $19 billion in yuan during the period.

Dollar Reliance

China is promoting greater use of the yuan to reduce reliance on the U.S. dollar after Premier Wen Jiabao said in March he is concerned about holding too many assets in the American currency. The country had $2.65 trillion in foreign reserves, almost 34 percent of the world’s total, at the end of September. The yuan accounted for 0.3 percent of global foreign exchange transactions in April, according to the Bank for International Settlements.

China has allowed the yuan to trade in a band set daily against the dollar and other major currencies since July 19. It rose to 6.6239 per dollar on Nov. 12, the highest level since an official peg to the U.S. currency ended in 2005.

Liberalization of yuan settlement through Hong Kong could cause up to 50 percent of China’s trade with emerging nations to be carried out in renminbi within five years, HSBC analysts led by Hongbin Qu, the chief China economist, said in a note Nov. 9. That would result in $2 trillion of yuan trade annually, making renminbi among the world’s three most-used currencies for buying and selling goods and services, the analysts said.

‘Proportional Say’

“As the world’s second-largest economy, China does not have proportional say and influence in international economics and finance,” Li wrote in the September article. “This is the result of a currency that lacks international standing. Every move towards making the renminbi an international reserve currency results in a greater say for China in the geopolitical arena.”

Concern that investments from outside the country will inflate asset bubbles spurred China to mandate boosting minimum holdings of foreign currency among banks and toughening their audits of overseas fundraising, the central bank said Nov. 10.

Convincing authorities in Beijing to approve the IPO plan may not be possible, said David Webb, a former director of the Hong Kong exchange, in an interview from the city.

“Li is the driving force behind the proposal,” said Webb, who said investors won’t risk money in a program that might be suspended by China’s government. “It’s premature to be trying so hard to push this water uphill,” he said. “You have to ask him why he’s so keen on it.”

Investor Interest

Mark Konyn, who helps manage more than $12 billion as chief executive officer of RCM Asia Pacific in Hong Kong, said the plan may be crippled if too few investors take part.

“The worry is that there isn’t enough flow,” Konyn said. “If things don’t happen in the right sequence, there could potentially be a shortage of currency.”

Hong Kong’s central bank may strike a deal with the PBOC to guarantee a supply of funds, said Francis Cheung, who oversees China strategy at CLSA Ltd. That could be achieved by borrowing yuan and using Hong Kong dollars as collateral. The authority has been granted a license to invest in yuan stocks and bonds, China’s Securities Regulatory Commission said on its website.

Money Flows

“The whole idea is to get renminbi circulating, not just sitting there doing nothing,” Cheung said in an interview from Hong Kong. “Yuan IPOs are something that has to get done. The reason is that yuan deposits in Hong Kong have been piling up very rapidly. If they don’t create yuan products, then money is going to start going to other places, such as the property market.”

Li’s career has run parallel to China’s opening. After spending his childhood in the northwest Gansu province, he left home at 16, crossing the country to work on an oil rig in Bohai Gulf and learning English in a company program.

He worked as a reporter and editor for the government-run China Daily newspaper for two years starting in 1984 before getting a journalism scholarship at the University of Alabama in Tuscaloosa. Later he received a law degree from Columbia.

Li was the primary lawyer for Beijing’s Finance Ministry during the China government’s $1 billion debt sale in February 1994. While Chinese officials and Merrill Lynch called the offering a success, the 6 1/2 percent notes, priced at $994.06 per $1,000, cost about $850 by year-end and yielded 116 basis points, or 1.16 percentage points, more than Treasuries, from 85 when sold.

QDII Program

The sale represented a step in China opening up to global investors, a program that continues today. The government is increasing the number of fund managers, brokerages and banks allowed to invest money offshore under the qualified domestic institutional investor, or QDII, program.

Regulators had approved a combined $66.9 billion in QDII funds as of Sept. 30, according to the State Administration of Foreign Exchange. That compares with $19 billion approved under the qualified foreign institutional investor, or QFII, program that gives non-Chinese firms access to the country’s securities markets.

Hong Kong Exchanges has hosted a record HK$373.4 billion in initial public offerings of stock this year, including its first listings by Russian and French firms, according to data compiled by Bloomberg. About 44 percent of money raised was from IPOs of Chinese companies, according to the exchange.

The bourse reported third-quarter net income declined 0.5 percent to HK$1.22 billion on Nov. 10 as trading volume fell. Profit for the nine months through Sept. 30 rose 2 percent. Li says allowing companies to raise funds in yuan on his exchange will help maintain the flow of business from China.

“Connecting with the mainland isn’t easy,” said Danny Yan, Hong Kong-based money manager at Taifook Asset Management in Hong Kong, which oversees about $400 million. “Charles is a mainlander who’s got international experience and very good relations with Beijing. The exchange needs such a person.”

To contact the reporters for this story: Hanny Wan in Hong Kong at hwan3@bloomberg.net; Nick Gentle in Hong Kong at ngentle2@bloomberg.net.

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net.

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