Cornerstones are sending Hong Kong stocks to a trading graveyard. Chinese state firms increasingly rely on friendly investors to help them list in the former British colony, leading to unrealistic pricing and immobile shares. The city’s stocks are already thinly traded and these initial public offerings worsen the problem. No wonder bankers are fed up.
For years cornerstones, who commit to buy a fixed amount of stock and hold it for six months, have helped companies to float by lending their backing. But the recent determination of mainland issuers to list in Hong Kong is creating major distortions.
It used to be that, perhaps, just one-fifth of a new issue would be set aside for tycoons, sovereign funds and so on. Now it is typical for a majority of shares on offer to go to other Chinese state entities. So money effectively just shuffles between state coffers. An upcoming $8 billion debut by Postal Savings Bank of China could rely on $6 billion of cornerstone money, reports Reuters.
That creates IPOs as unreal as the blue skies China is conjuring up to host the G20. Prices are typically inflated and firms end up avoiding the scrutiny of serious global shareholders.
Trading sucks, too. Look at ten recent cornerstone-heavy deals, including China Huarong, China Reinsurance Group, and China Railway Signal. Eikon data shows trading volumes for the last 10 days averaging just 0.05 percent of outstanding shares. That’s one-third the rate of the city’s flagship Hang Seng index, and less than one-sixth that seen on the U.S. Dow Jones. Turning over the whole shareholder register would take seven long years.
No surprise then, that bankers are increasingly voicing discontent, albeit privately. Leave aside the insult this poses to their free-market ideals. Mainland issuers are stingy fee-payers, buyside clients are sidelined, and subsequent secondary-market business is dire.
The Hong Kong exchange could step in. It looked at cornerstones in 2015 and found evidence of damage to liquidity or returns was “inconclusive”, but the problem has become much worse since. Although the setup is working for issuers, and no-one is forcing investors to buy these stocks, cornerstones are turning Hong Kong into a make-believe market.