Initial public offerings of Chinese banks have been one of the biggest stories this month.  Aside from the widely talked about Bank of China IPO on the Hong Kong stock exchange, totaling US $9.7 billion, China CITIC Bank just announced plans for a US $1 billion IPO at the end of the year.  This year alone, two more large Chinese banks have announced intentions of being listed in Hong Kong, namely the Industrial and Commercial Bank of China (ICBC), one of the four largest banks in the country and the China Merchant Bank.  The ICBC deal, estimated at US$12 billion could even eclipse that of the Bank of China deal.  As more large initial public offerings get done in Hong Kong rather than on the New York stock exchange here in the US, the country will benefit from increased foreign investment to the detriment of the US financial markets and the US dollar.  At a time when large players such as central banks are already diversifying away from the US, the dollar cannot afford to have large investment money do so as well.  

IPO Levels Are Falling in the US and Increasing Abroad

With such a large trade and current account deficit, money pours out of the US on a daily basis.  One of the only ways to plug the deficit is to attract foreign investment.  The Federal Reserve has been doing its part by raising interest rates aggressively to increase the attractiveness of US treasuries, but the depreciation of the US dollar is forcing central banks to shy away.  The equity market however has not done its part to attract new capital as well with average IPO levels dropping 22 percent last year.  The President of the NYSE said at a recent Securities Industry conference in NY that in 2000, nine out of ten of the largest IPO listings that year was done on US exchanges.  In 2005, it was one in ten.  The average listing on Hong Kong and other Asian stock exchanges has increased 213 percent and even listings on European markets are up 11 percent.  

Demand Is There as Well

With the massive pace of Asian growth, these listings have seen heavy demand.  According to a PwC report, the average IPO on the Hong Kong exchange is now 1.25 times larger than the average listing on the NYSE.  The retail portion of the Bank of China IPO was 80 times oversubscribed while the institutional portion was 10 times oversubscribed.  By no means is this interest purely domestic, which means that other currencies including US dollars need to be sold to buy Hong Kong dollars to pay for the investment.  Although it is difficult to quantify, we are sure that many US investors as well as funds will be participating in the Bank of China IPO since the Bank of America, Citigroup and Goldman Sachs have all been allocated shares.  We just have to look back at last yearââ,¬â"¢s China Construction Bank offering where J.P. Morgan enlisted Henry Kissinger to try to convince China to give them a piece of the deal (it failed).  Many of the leading banks here in the US have put people who have deep ties to China on their payrolls while the CEOs of the banks have made multiple trips to China last year to woo local partners.  Even Billionaire Saudi Price Alwaleed who owns a large stake in Citigroup has announced a large interest.  He said that his company will be bidding $2 billion for a 2.7 percent stake in the Bank of China IPO. 

Why Is There an Increased Number of Foreign IPO Listing?

There are two primary reasons why more companies are seeking IPO listings on foreign exchanges rather than on the NYSE.  One is that the requirements to be listed on the NYSE are more stringent and it is easier for Chinese banks to be listed on the HK exchange.  The Bank of China still has a number of problems including $13 billion of bad loans and fraud investigations.  Although a public listing will require the bank to be more accountable and responsible, right now it may not have what it takes to be listed on the NY exchanges.  The second and equally important reason is the Sarbanes-Oxley corporate governance regulations that were introduced in 2002 and the SEC investigation into China Life.  The Sarbanes-Oxley regulations are not just tempting Chinese companies to list on other exchanges, but also hurting venture capital firms in the US.  According to an Ernst and Young report, US venture capital firms saw a 17 percent growth in the aggregate amount paid for acquisitions while European firms saw a 71 percent growth in number of transactions and a 185 percent growth in capital raised.

Is This Trend Here To Stay?

If this trend of non US offerings continues, the US dollar faces a very big risk.  The Asian stock exchanges are becoming a very big competitor of the US exchanges.  Money that otherwise would have been earmarked for US listings are now headed elsewhere.  If the listings were done on the NYSE or the NASDAQ, it would increase the demand for US dollars as foreign investors hope to participate.  However, the scenario is the exact opposite at this point.  Not only is the money not coming into the US and into US equity markets, US investors are selling their dollars to participate in the more attractive listings aboard. IPO fever should not be a concept foreign to many and now that Hong Kong has both China and IPO fever to its benefit at the same time, unless the US reduces its protectionism measures and relaxes the Sarbanes-Oxley regulations, the US dollar has yet another problem to contend with.

Kathy Lien is the Chief Currency Strategist at FXCM.