Hongkongers Seek $353 Billion in Loans to Bet on City’s Red-Hot IPOs

IT’S ENOUGH MONEY TO BUY ALIBABA GROUP HOLDING, OR PAY EVERY RESIDENT OF HONG KONG ALMOST $50,000

The figure – more than US$353 billion – represents the amount of margin loans sought by the city’s retail investors to bet on red-hot initial public offerings (IPOs) this year.

The Frenzy is Causing First-Day Pops, Creating Headaches for Investment Banks and Attracting Scrutiny from Regulators

The way Chan, who works in a back office function for a conglomerate, sees it, there’s virtually no risk to the wagers if he sells within the first few minutes of trading.

Regulators Worry that Mom-and-Pop Speculators Will End Up Getting Burned

That cannot-lose mentality is starting to worry Hong Kong authorities. The city’s financial regulator is reviewing eight brokers with the highest IPO oversubscription volumes, Securities and Futures Commission (SFC) chief executive officer Julia Leung said in February, without naming the firms.

Margin Loans with Interest Rates as Low as 0 per Cent

Behind it all is an intense competition among local brokers to offer what looks to some like an irresistible deal – margin loans with interest rates as low as 0 per cent.

Clawing Back

Market participants say retail investors tend to hold the IPO shares only briefly once trading starts, before flipping them for a profit. They can also sell the shares before the listing itself on the grey market the day before. They then pay back the margin loan for the amount they get allotted while booking the gains.

A Record Bid for a Listing in the City

Last week, retail traders sought more than HK$1.8 trillion (S$312 billion) in margin loans to get a slice of tea-and-ice-cream chain Mixue Group’s IPO. That represented more than 5,300 times the shares reserved for them and a record bid for a listing in the city.

The Hong Kong Stock Exchange is Seeking Market Feedback to Allocate a Maximum of 20 per Cent to Retail Investors in Hot IPOs

If the stock exchange’s proposals were to materialise, the competition for shares among mom-and-pop investors would be even fiercer for hot deals, said Billy Au, a partner who has worked on IPOs at the law firm Johnson Stokes & Master.

Conclusion

For now, Hong Kong’s regulator will be keeping a close eye on demand for IPOs. “Even if some IPOs are thousands of times oversubscribed, they can still fall” after debut, the SFC’s Leung said. “Investors should exercise caution.”

FAQs

Q: What is the total amount of margin loans sought by retail investors to bet on IPOs this year?
A: More than US$353 billion

Q: What is the total amount of margin loans applied for the Mixue Group’s IPO?
A: More than HK$1.8 trillion (S$312 billion)

Q: What is the ratio of margin-loan offerings before the Fini system was introduced?
A: 10 to 20 times leverage

Q: What is the current ratio of margin-loan offerings after the Fini system was introduced?
A: 100 times leverage or more

Q: What is the proposed maximum allocation to retail investors in hot IPOs?
A: 20 per cent