Foreign retail investors locked out as China's mainland IPOs deliver record run

International retail investors can’t get in on the action as Chinese artificial intelligence companies rack up huge gains in their stock debuts. Complex rules are keeping most overseas individuals from buying shares in these hot offerings.

MetaX Integrated Circuits, a chipmaker, saw its stock price shoot up almost 700% when it started trading in Shanghai last week. Moore Threads did even better earlier this month, with shares jumping over 400% on day one.

There’s plenty of interest from global markets, but foreign retail investors hit a wall trying to access these mainland Chinese initial public offerings.

Chris Zhang puts it simply. He’s executive director at China Fortune Securities Company, a Chinese financial services firm. “It’s not even possible. Unless they open up an account with a Chinese broker,” he told CNBC.

The problems start right away with basic account requirements. Opening a brokerage account with a Chinese securities company means you need a Chinese bank account first.

Getting that bank account usually requires proof that you live in China or a Chinese visa that hasn’t expired yet. There’s more though. Foreigners also need to already own shares in mainland-listed companies before they can enter the lottery for new stock offerings.

Most foreign banks don’t have the right arrangements with Chinese brokerages to help their customers open these accounts, Zhang said. That makes the whole thing impossible for just about everyone living overseas.

Only select foreigners qualify for direct A-share trading

Shanghai city government guidelines lay out who can directly open brokerage accounts for A-shares—that’s what stocks listed on mainland Chinese exchanges are called. Only certain foreigners qualify. People with permanent resident status can do it. So can foreigners working in China, or those working abroad who get equity compensation at A-share listed companies.

A lot of global investors use Stock Connect instead. It’s a program that links Hong Kong and mainland Chinese exchanges so they can access each other’s stocks. The system lets overseas investors buy A-shares through Hong Kong brokers. No onshore account needed, no special licenses required.

But it doesn’t help much with initial public offerings or newly listed companies. Plus Hong Kong brokers have their own rules about who can participate, like minimum account balances and risk disclosure forms.

Theodore Shou is chief investment officer at Skybound Capital. “Stock Connect does not work because newly listed stocks are not included in Stock Connect as yet. Usually, it takes a few weeks to months should the stocks qualify,” he said.

Newly listed stocks face months-long wait for stock connect inclusion

Companies have to meet certain standards to get into the Stock Connect program. Things like enough trading activity and market value. That usually means they need some time to build up trading history and data before qualifying.

Northbound trading is what they call it when overseas and Hong Kong investors buy mainland China stocks through Stock Connect and other programs. Shou said it won’t be available until “typically several months after any listing.” And even then, Moore Threads and MetaX might not get included.

Overseas retail investors do have one option, though it’s limited. They can use offshore funds that invest in A-shares. Foreign retail investors interested in STAR Market IPOs like Moore Threads and MetaX can put money into funds based outside China that buy A-shares, Shou explained. These funds usually participate in IPOs.

China’s STAR Market is Shanghai’s tech board, kind of like the Nasdaq. It focuses on strategic sectors—semiconductors, artificial intelligence, biotech. The board has looser profitability requirements but stricter rules for foreign retail investors.

But Shou added a warning. “However, such participation will be indirect, very limited, and mostly non-meaningful.” The IPO allocations are often tiny compared to what the fund holds overall.

The performance numbers show what foreign investors are missing out on. The CSI 300 Information Technology Index tracks information technology companies within China’s CSI 300. It’s up 32% year to date. Compare that with the benchmark CSI 300, which has risen 17%. Hong Kong’s Hang Seng Tech Index has gained 24% so far this year.

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