How to Invest in RMB Securities Outside China

The time is now ripe for Renminbi (RMB, CNY, or Yuan) securities in Hong Kong, outside the mainland China. Cheung Kong Group (stock code: 001.hk), a property developer owned by Asia's richest billionaire and business tycoon Li Ka-Shing, spins off its mainland portion of assets to Hui Xian (stock code: 87001.hk), a RMB-denominated Real Estate Investment Trust (REIT), to raise up to RMB 11.16 billion that will all be used to repay debts.

The Hui Xian REIT will become the first RMB-denominated equity listing in Hong Kong. The Hui Xian IPO (Initial Public Offering) subscription period will last until 19 April 2011, with the offer price set between RMB 5.58 to RMB 5.24 per unit and the corresponding distribution yield projected from 4.00% to 4.26% respectively. The first trading day of Hui Xian REIT will be 29 April 2011.

The Hui Xian REIT will be traded and cleared in RMB through CCASS (Central Clearing and Settlement System), its price will be quoted in RMB, and the fund dividends will also be calculated im RMB but may be paid in other currency if, due to the RMB exchange restrictions, the issuer cannot source sufficient RMB in time to pay dividends. Hui Xian relies solely on the profit distributions of Oriental Plaza, a large-scale shopping complex and integrated projects near the Tian'anmen Square in Beijing, for the next 38 years until 24 January 2049 (unless terminated earlier) based on a lease agreement signed in 1999.

Oriental Plaza is a landmark development located exactly at the East Chang'an Avenue and the famous Wanffujing retail street. Its construction consists of The Malls, The Tower Offices, The Tower Apartments, a five-star Grand Hyatt Beijing Hotel, Car Parts as well as other ancillary facilities. Prior to the listing, Oriental Plaza is 33.4% owned by Cheung Kong, 19.8% owned by Bank of China (BOC stock codes: 601988.ss for A-shares and 3988.hk for H-shares), 19.8% owned by China Life Insurance (CLI stock codes: 601628.ss for A-shares and 2628.hk for H-shares) and 18% owned by Hutchison Whampoa Ltd (HWL stock code: 013.hk).

You may have several questions in your mind: How to participate in the Hui Xian IPO? What need to know first before investing in this new RMB security in Hong Kong? Here are the answers:

(1) For settlement purpose, you need a RMB bank account in Hong Kong and also sufficient amounts of RMB for trading. Please note that the daily maximum exchange limit for renminbi is still RMB 20K per individual in Hong Kong banks. Hong Kong banks are also not permitted to provide RMB margin financing to personal customers. However, such restrictions are not applicable to non-bank brokers which can convert RMB freely in Hong Kong's RMB Offshore Market. Most non-bank brokers are now offering loan amount up to 90% of the IPO subscription amount, but their margin lending rates do vary significantly depending on their own RMB base and how easy they can obtain extra RMB. One of the non-bank brokers, in particular, offer margin lending rates of 2.35% p.a. for loan amount less than RMB 10 million, 2.25% p.a. for loan amount over RMB 10 million but less than RMB 50 million, and 2.15% p.a. for loan amount over RMB 50 million. Some brokers without sufficient RMB can only offer margin lending rates between 3% p.a. to 5% p.a., while a few brokers can offer a very competitive lending rate as low as 1.78% p.a.

In order to compete for more RMB business against non-bank brokers, however, most Hong Kong Banks are providing special offers such as:

(i) Brokerage fee waiver for buying Hui Xian REIT during the first 3 trading days.
(ii) RMB exchange rate premiums up to 30 basis points. (iii) RMB IPO subscription fee waiver.
(iv) Discounted handling fee for issuance of RMB cashier's order that can be used for IPO subscription using White Forms.

(2) For trading purpose, you need a securities trading account from your bank or broker that have successfully completed the RMB business readiness tests set by the Hong Kong Stock Exchange (HKEx stock code: 388.hk).

(3) For IPO application, you may either:

(i) use a physical White Form (REIT units will be issued in your own name) or a physical Yellow Form (REIT units will be issued in the name of your nominated broker or bank). If you apply RMB IPO through Yellow Form, since the REIT units will not be issued in your own name, your broker or bank may allow you to settle your IPO subscription payment in Hong Kong Dollars (HKD) and hence you will need to care about the exchange rate they offer.

(ii) apply online via White Form eIPO. However, you have to settle the relevant eIPO payment through a RMB bank account in one of 3 specified banks, which are: Bank of China Hong Kong (BOCHK stock code: 2388.hk), HongKong and Shanghai Banking Corporation (HKBC stock code: 005.hk) and Hang Seng Bank (HSB stock code: 011.hk). In addition, these banks do have a maximum daily transfer limit through the internet, for example, HKBC allows no more than RMB 5 million each day.

(iii) make use of your Investor Participant Account (IPA) opened with HKSCC (Hong Kong Securities Clearing Co. Ltd.) to apply electronically for the RMB-denominated securities, but please make sure you have a RMB Designated Bank Account set up with CCASS.

Unless you apply using a Yellow Form, you will of course have to pay for the number of REIT units subscribed, plus the SFC (Securities and Futures Commission) transaction levy, HKEx trading fee and brokerage commission in RMB. If you settle your RMB IPO payment by cheque, you will need to open an additional RMB cheque account in your bank. Please be aware that some banks have imposed a daily internal limit (usually RMB 80K) on amount of cheques you can issue.

Remark: any RMB IPO application for the benefit of a legal or natural person of the People's Republic of China (except for the so-called QDII: Qualified Domestic Institutional Investors), a person within the United States, or a United States person (as defined in Regulation S under the United States Securities Act) is not acceptable.

(4) In secondary trading market (after IPO period), transaction costs such as stamp duty, SFC transaction levy and HKEx trading fee on purchases and sales of the listed RMB-denominated securities will be paid in HKD through your broker or bank, based on an daily fixed exchange rate set by the Hong Kong Monetary Authority (HKMA) on each trading day. For RMB withdrawal, you can only transfer-out RMB to your own RMB account(s) with a licensed bank in Hong Kong.

The above explains comprehensively how one can invest in RMB securities in Hong Kong. In the future, we will explore more RMB investment opportunities hopefully not only in Hong Kong but also somewhere else outside China.


Next article: Stock Analysis of Hui Xian REIT, the First RMB IPO