Editorial | Hong Kong SFC’s bid to cool IPO margin lending fever boosts market health

Margin lending for retail investors hoping to make a killing in “hot” initial public offerings (IPOs) has frequently reached excessive levels. Many individual investors are happy to load up their subscriptions to IPOs in the hope of being allotted a bigger piece of the pie. Brokers and banks have been more than willing to lend to them for short terms and at relatively low or even zero interest. The practice has so far been lightly regulated. Popular IPOs could become thousands of times oversubscribed as a result.

Now, warning of “imprudent and aggressive financing practices”, the Securities and Futures Commission (SFC), the city’s market watchdog, will finally impose some restraint. Brokers will be required to collect an upfront subscription deposit of 10 per cent from clients who do not fully pre-fund their IPO orders. Licensed corporations also have been instructed to take reasonable control measures to prevent a client from submitting multiple IPO orders.

The need for closer regulation is pressing as Hong Kong braces for a bumper crop of fundraising this year. The city dominated much of the 2010s as the top global destination for IPOs, but in recent years has struggled, falling to 13th spot last June before clawing back to finish 2024 in fourth place.

The trend began to shift with the central government encouraging mainland companies to tap into the financial centre to raise capital and broaden their funding sources.

As a result, a deluge of IPOs is expected to hit the city, amid optimism in the tech sector and the revival of global interest in mainland equities. Such fundraising on the Hong Kong stock market could increase by as much as 80 per cent from last year, according to Financial Secretary Paul Chan Mo-po.

While that is good news for the stock market, it makes sense that the SFC is taking precautionary measures ahead of time.