Hong Kong's financial system battered by big IPO deals

Hong Kong

HONG Kong's newfound position as the market of choice for huge Chinese stock sales was earlier put to the test by the now-cancelled Ant Group IPO.

While Beijing encourages Chinese firms to reduce their reliance on Wall Street, Hong Kong's US$5.9 trillion stock market is becoming the main beneficiary. But it is not without cost.

The relatively small size of the former British colony's financial system, its open capital borders and pegged currency makes the city vulnerable to large flows of money in a way other large financial centres are immune.

Demand for share sales can spur central bank intervention in the currency market and flood the city with liquidity, creating havoc with interbank lending rates.

The potential benefits are large. Ant's planned initial public offering (IPO) would have accelerated the stock benchmark's transformation from an underperforming old-world gauge to a dynamic index that better reflects China's growing technological prowess. But on Tuesday, China put the brakes on Ant's US$35 billion share sale, derailing the world's biggest initial public offering.

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While there are risks to any hyped-up listing, the massive demand for Ant's shares would likely prompt more firms to follow suit and sell shares in Hong Kong, boosting its market capitalisation and making its stock market an increasing rival to New York.

One of the clearest upshots from the inflows into Hong Kong has been the sustained strength of the Hong Kong dollar, which has held near the strong end of its currency peg with the greenback as demand for local currency soared to a record.

When Ant stopped taking orders from big investors, the local dollar retreated from the 7.75 per greenback level, though analysts pointed out at the time that demand for Ant's shares and future listings by other Chinese companies should continue to boost demand.

Hong Kong's de-facto central bank took unprecedented steps to flood the banking system with liquidity as investors piled into Ant Group earlier, stepping into the market a total of 85 times since April and selling about HK$383 billion (S$67.3 billion) to defend the currency peg.

As a result, the interbank liquidity pool was lifted to the largest on record at more than HK$450 billion. Analysts had said that the Hong Kong Monetary Authority was expected to sell extra debt to soak up liquidity as funds return following the IPO.

If Ant's IPO had not been postponed, trading activity in Hong Kong on Thursday would have been likely to rival the previous milestone set more than five years ago by Hong Kong Exchanges & Clearing Ltd, which hit two record trading days after mainland-based fund managers used a change in regulations to increase their holdings.

It had been expected that Ant's IPO could break that record of nearly HK$292 billion. Bidding among retail investors was so intense in Hong Kong that one brokerage's platform briefly shut after being overwhelmed by orders. Demand for the retail portion in Shanghai exceeded initial supply by more than 870 times.

The city's benchmark Hang Seng Index has an abundance of old-economy financial stocks, taking up more than 40 per cent of the index weighting. That makes it look relatively outdated at a time when China's tech giants have increasing sway. BLOOMBERG

READ MORE: World's biggest IPO halted as Ant Group feels Shanghai's bite