Looming $10 Billion IPO Has Hong Kong Bracing for a Cash Crunch

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Looming $10 Billion IPO Has Hong Kong Bracing for a Cash Crunch

Snaring what is shaping up to be the world’s biggest initial public offering of 2018 could be a double-edged sword for Hong Kong.

Chinese smartphone maker Xiaomi Corp., which has ambitions to take on Apple Inc. and Samsung Electronics Co., is said to be preparing to file for an IPO that’s expected to raise at least. A listing of that magnitude — the biggest ever for Hong Kong — would suck up cash in the $5.6 trillion equity market, locking up the funds of subscribers to the offering.

Market players already got a taste of the cash crunch a giant IPO brings when Ping An Good Doctor, a unit of China’s biggest insurer by value, startedfor its $1.1 billion IPO last week. Hong Kong’s one-month Hibor rate, a key measure of liquidity in the market, jumped by the most in nearly a decade.

The impact of a mega IPO could be significant, says Ronald Man, a strategist at Bank of America Merrill Lynch in Hong Kong.

“We could expect a very notable increase in Hibor if an IPO is very oversubscribed,” Man said. “Hong Kong dollar funding conditions could tighten temporarily during an IPO process — this tightening of funding conditions usually lasts until the IPO process is over.”

Downward Pressure

Beijing-based Xiaomi is targeting a valuation of as much as $100 billion, people familiar with the matter have said. The company declined to comment on the mooted IPO, which could be the largest worldwide since Chinese e-commerce giant Alibaba Group Holding Ltd. raised $25 billion in its 2014 debut in New York.

If the IPO comes soon, it could fuel downward pressure on the stock market, which is already weak on concern over the trade dispute between the U.S. and China and the recent volatility in technology shares, said Hao Hong, chief strategist at Bocom International Holdings Co. in Hong Kong.

Xiaomi’s IPO would further limit the money out there chasing stocks, he said. Hong Kong’s Hang Seng Index capped a second-straight week declines on Friday.

Ping An Good Doctor wasn’t the first big IPO to trigger a spike in Hong Kong’s interbank rates. When China Literature Ltd. — the e-book arm of tech behemoth Tencent Holdings Ltd. — went public in November, the overnight Hibor rate jumped as investors placed their orders.

More IPOs

And there’s likely more IPOs on the horizon. Last week, the Hong Kong stock exchange approved theto its listing rules in two decades, paving the way for technology firms with dual-class share structures like Alibaba to list in the city.

Demand is likely to be strong for Xiaomi’s offer. The world’s fifth-largest smartphone vendor, the company hasat strong profitability in its other services, which range from video streaming to online financing. Xiaomi also makes money on advertising via its own apps and by providing paid subscriptions for premium entertainment content such as web videos and books.

“People have been talking about the size of the Xiaomi IPO,” said Ronald Wan, chief executive officer of Partners Capital International in Hong Kong. “If the market response is overwhelming, there will be billions of dollars coming back to the Hong Kong market — but if all the money goes to the IPO it would create upsurge impact on the Hibor as well.”

Currency Upside

On the upside, a spike in interbank rates would likely be positive for Hong Kong’s dollar, Bofa Merrill Lynch’s Man said.

A narrower rate gap with the U.S. would burnish the appeal of the currency, which hit the weak end of itswith the dollar earlier this month. That would provide some relief for the Hong Kong Monetary Authority, which has plowed through HK$51.3 billion ($6.5 billion) in recent weeks buying up the local currency to support it.

The Hong Kong dollar does tend to strengthen up to two weeks before big listings as liquidity tightens amid subscriptions and as funds get locked up, according to Goldman Sachs Group Inc. The currency remains near the weak end of its trading band, falling 0.02 percent to HK$7.8479 versus the dollar on Friday.

— With assistance by Kana Nishizawa, Tian Chen, Crystal Tse, and Yuan Gao

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