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Hong Kong financial officials and bankers expect a record level of subscription proceeds for Industrial and Commercial Bank of China’s initial public offering - a unique stress test for the territory’s well-oiled banking system.

The ICBC offering is expected to be the world’s largest at up to $21bn, with as much as $16bn being raised in Hong Kong and the remainder in Shanghai.

Bankers said strong demand from investors, who are required to present their money up front, could release more than $35bn (HK$275bn) and half a million cheques on to Hong Kong’s interbank settlement system.

The record amount in subscription proceeds attracted by a successful Hong Kong IPO is HK$274bn for Bank of China’s HK$86.6bn flotation in June.

The Hong Kong government’s Link Reit attracted slightly more money in December 2004, only for the offering to be postponed at the last minute.

Large IPOs in Hong Kong set off two big payment flows that must be carefully synchronised to ensure the smooth working of the territory’s financial system.

Subscription proceeds are parked for up to six days with designated receiving banks, who have to pay issuers interest on that capital.

At current Hong Kong overnight lending rates, bankers estimate ICBC could reap as much as HK$174m in interest from the pooled subscriptions.

To lessen the interest burden, receiving banks match the proceeds with demand from so-called “sponsoring banks”, which lend money to investors in the IPO.

“If the recycling of funds from the receiving banks to sponsoring banks is done efficiently, there shouldn’t be too much impact. The system is capable of coping with huge fund flows,” said one executive.

Hong Kong’s interbank system routinely handles as much as HK$500bn in daily settlements.

“But the current orderly situation is not something that we can take for granted. We can have a messy situation if the money gets stuck.”

Under the currency board, every 7.8 Hong Kong dollars must be backed by one US dollar.

As a result, interest rates fluctuate in line with the supply of Hong Kong dollars in the system. Any failure to recycle the subscription proceeds could thus put upward pressure on rates.

Bank of China’s record-setting IPO was processed without upset, although it did coincide with a small spike in overnight lending rates. In the most dramatic example, they surged through 20 per cent in 1986 during the mania that surrounded Cathay Pacific’s IPO.

“We expect receiving banks to work closely with sponsoring banks in large IPOs to minimalise possible pressure on the interbank money market and interbank payment system,” HKMA said.

Copyright The Financial Times Limited 2017. All rights reserved.

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