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Financial & markets regulation
China blacklists nine HSBC mutual funds for IPO violations
HSBC office tower in Hong Kong’s central business district © Bloomberg
YESTERDAY by: Gabriel Wildau in Shanghai
HSBC’s China fund management venture has been punished for misconduct related to IPO subscriptions, as regulators proceed with a broad campaign against financial corruption.
China’s securities regulator is cracking down on bad behaviour in a mainland share market that is expected to attract up to 500bn dollars in foreign money over the next decade following the inclusion of so-called A shares into MSCI’s emerging markets index.
The China Securities Regulatory Commission has already set a record for market-manipulation fines for a third straight year. This week a CSRC-controlled industry association banned 1,012 funds and individual investors from buying IPO shares for up to 12 months.
As one of the most lucrative areas of China’s stock market, initial public offerings have long been a magnet for corruption. In April, a former official at the Shenzhen Stock Exchange in charge of reviewing IPO applications was fined Rmb499m (74m dollars) for buying IPO shares through his relatives’ accounts.
The CSRC tightly controls the flow of listings, creating a perpetual scarcity of new shares. The agency also enforces an unofficial cap on price-to-earnings ratios at about 23.
The result is that IPO shares are priced substantially below what they can fetch on the open market, leading to rampant arbitrage. For those able to win IPO share allocations, risk-free profits from opening-day price pops are virtually guaranteed. Many Chinese hedge funds are established solely to buy IPO shares — a uniquely Chinese phenomenon.
“Even though IPO returns are decreasing this year, the CSRC wants to punish some funds that have misbehaved in the past,” said Hao Hong, head of research for Bocom International in Hong Kong.
HSBC Jintrust, a joint venture between HSBC Global Asset Management and Shanxi Trust Co, led the blacklist, with nine funds with combined assets of Rmb14.2bn (2.1bn dollars) under management.
Among these is the HSBC Jintrust Large Cap Equity Securities Investment Fund, one of China’s top-performing stock funds. With Rmb4.7bn under management and a five-star rating from Morningstar, its share price has nearly tripled in the past three years.
HSBC Jintrust said nine of its funds did participate in the price discovery process for the IPO of Xinjiang Sailing Information Technology, in December 2016.
“However, after consideration, HSBC Jintrust decided not to continue with subscription of the mentioned stock,” the group told the FT.
The group added that the nine onshore funds are equity and balanced funds — that is, they don’t exclusively invest in IPOs — and so the IPO-buying ban will have minimal impact on the funds’ returns.
HSBC owns a 49 per cent stake in Jintrust, in line with previous rules limiting foreign institutions to minority-owned joint ventures. Last year, authorities began approving wholly-foreign-owned fund management companies, but they are not approved to sell mutual funds to retail investors.
The securities association said that the blacklisted accounts violated rules on IPO allocations, without providing details. The list was based on inspections of 52 IPOs in November and December 2016. Some 125 institutions were cited, including banks, brokerages, insurers and fund companies.
According to local media, many accounts were punished for submitting winning bids but then failing to proceed with actual share purchases.
Analysts say that insincere bidding has become more common this year, as the CSRC has quickened the pace of IPO approvals, reducing the structural scarcity of new shares and tempering first-day price pops. But some fund managers may collude with underwriters to create the impression of heavy demand for an IPO.
“When you have a very heated bookbuilding process, then later on when the stock starts trading, it can create even more demand from the secondary market,” said Mr Hong.
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