MetaX, Moore Threads IPOs exploded, but it’s not easy for foreigners to join the party

China’s hottest artificial-intelligence listings are delivering eye-popping gains.

Shares of chipmaker MetaX Integrated Circuits skyrocketed almost 700% in their Shanghai market debut last week, while Moore Threads soared over 400% on its first day of trading earlier this month.

While domestic investors scramble for exposure to promising Chinese tech listings, overseas investors are largely left out from partaking in such blockbuster offerings.

Foreign retail investors in particular are shut out of mainland China IPOs: “It’s not even possible. Unless they open up an account with a Chinese broker,” said Chris Zhang, executive director at Chinese financial services firm China Fortune Securities Company.

Opening an onshore brokerage account with a Chinese securities firm requires a linked Chinese bank account, which generally requires a proof of residence in China, or a Chinese visa with sufficient validity. Foreigners also need to already hold other mainland-listed shares before being eligible to participate in an IPO lottery.

Most foreign banks do not have the necessary arrangements with Chinese brokers to support account openings, Zhang said, making the process unworkable for the vast majority of overseas retail investors.

Official guidance from Shanghai’s city government states that only a narrow set of foreign individuals can directly open brokerage accounts for A-shares — stocks listed in mainland China. For example, foreigners with permanent resident status, workers in China, or foreigners working abroad with equity incentive plans in A-share listed companies.

For many global investors, Stock Connect, a program that allows Hong Kong and mainland Chinese exchanges mutual access to each other’s stocks, is the most convenient way to gain exposure to Chinese equities.

It allows overseas investors to buy A-shares through their Hong Kong brokers without needing an onshore account, or special licenses— but the scheme offers little help when it comes to IPOs, or even freshly listed stocks. Access also depends on Hong Kong brokers’ eligibility requirements, such as minimum account balances and risk disclosures.

“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,” said Theodore Shou, chief investment officer at Skybound Capital.

Inclusion of companies in the Stock Connect scheme depends on whether a stock meets the eligibility rules such as sufficient trading activity and market value, which often requires a period of trading and data history for qualifying.

Northbound trading, which refers to overseas and Hong Kong investors buying mainland China stocks via Stock Connect and other schemes, will not be available until “typically several months after any listing,” Shou said. Even then, it’s not a guarantee that Moore Threads and MetaX will be included.

Overseas retail investors can gain limited exposure through offshore funds that invest in A-shares.

Foreign retail investors interested in STAR Market IPOs, such as Moore Threads and MetaX, can invest in non-China domiciled funds that invest in A-shares and usually these funds do participate in IPOs, Shou said.

China’s STAR Market is a Nasdaq-style tech board in Shanghai focused on strategic sectors such as semiconductors, AI and biotech, with looser profitability requirements and tighter access for foreign retail investors.

“However, such participation will be indirect, very limited, and mostly non-meaningful,” he caveated, as IPO allocations may be tiny relative to the fund’s total assets.

While foreign retail investors are largely locked out of access to mainland Chinese IPOs, some large institutions can participate in them.

A program for qualified foreign institutional Investors, or QFIIs, allows approved global institutions to invest directly in onshore Chinese stocks, including IPOs. But it is designed for large asset managers, sovereign funds and banks, not individual investors.

QFIIs include the likes of investment banks such as Morgan Stanley and Goldman Sachs as well as central banks, among hundreds of other participants.

The QFII and renminbi QFII schemes are programs that allow approved institutional investors to trade onshore A-shares and participate in IPOs, but they require approval from the China Securities Regulatory Commission, with foreign-exchange registration and settlement overseen by the State Administration of Foreign Exchange, or SAFE.

While China’s QFII and RQFII regimes do not set explicit asset-size or operating-history thresholds, applicants must be institutions with sound financial standing, relevant investment experience, robust governance and compliance systems, and a clean regulatory record. 

They must also appoint an onshore custodian and complete foreign-exchange registration with SAFE.

The CSI 300 Information Technology Index, which measures the performance of information-technology companies within China’s CSI 300, is up 32% year to date, compared with the benchmark CSI 300, up 17%, and Hong Kong’s Hang Seng Tech Index, which has gained 24% so far this year.