* Limited yuan deposits hinder launch of yuan IPOs
* REITs best suited to test yuan equity products
* Li Ka-shing plans yuan REIT listing in Q1-sources
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By Alison Leung and Kelvin Soh
HONG KONG, Jan 14 (Reuters) - Billionaire Li Ka-shing is pushing ahead with a $1.5 billion yuan-denominated IPO, the first such in Hong Kong, with the issue's bond-like REIT format allowing it to get around the limited liquidity pool, sources said.
Boosting the chances of the deal's success was Beijing's announcement on Thursday that it will now allow companies to make overseas investments in yuan, which some see as a sign that the country's mandarins may be ready to liberalise its tightly controlled currency further. [ID:nTOE70C05Z]
Li is planning to spin off the rental properties in China held by his twin flagships, Cheung Kong (Holdings) and Hutchison Whampoa , aiming to raise 10 billion yuan ($1.5 billion) by listing them as a REIT as early as this quarter, according to banking sources, who declined to be named due to the sensitivities surrounding the deal.
"In terms of returns, this class of product is very similar to a (yuan) bond and so it is always being held long-term by investors," said Edward Au, partner, national public offering group of Deloitte China.
This would help Cheung Kong cross the biggest hurdle right now, which is the limited pool of yuan, also known as the renminbi or RMB, available in Hong Kong. Hong Kong's yuan deposits stood at 280 billion yuan in the territory at the end of November and is largely viewed as insufficient for stock trading to proceed sustainably.
"This one dwarfs all other challenges, that is the continued limited availability of RMB," Chief Executive of the Hong Kong Exchange and former JP Morgan banker Charles Li told a luncheon on Tuesday.
Li is a well-known for championing the cause of broadening the use of the Chinese currency outside mainland China, as it presents the HKEx with the opportunity of greater earnings prospects through yuan-linked equity products.
"Today we are all ready to issue RMB product, if the issuers want to do it certainly we are ready to entertain that," Li said. "But I think we are interested in a long term sustainable model that allow us to launch RMB products as a sustained enterprise, not just a couple of deals."
LIQUIDITY POOL
Many IPOs in Hong Kong are typically oversubscribed several times and stock issuers usually rely on subscription multiples to judge the market's response to a listing. That gives an idea of how much yuan is needed before yuan stocks can be listed in the territory.
For example, the IPO of Sinopharm Group in 2009 was 569 times oversubscribed, freezing more than HK$500 billion, or around 425 billion yuan.
Agricultural Bank of China alone raised about HK$94 billion ($12 billion) via its Hong Kong-listed H-shares last year, when it froze hundreds of billions of Hong Kong dollars as its institutional portion of the offer was 10 times subscribed.
To get around this, the HKEx is exploring the feasibility of developing a special RMB liquidity pool to help investors who do not have enough RMB to invest in yuan-denominated securities. It hopes the pool will be ready by the second half of 2011.
Hong Kong only allows individuals to buy or sell 20,000 yuan a day and companies have to prove the yuan are related to trade settlement before they can make such transactions.
However, the availability of yuan in Hong Kong is expected to grow and about a third of all brokers in Hong Kong have opened a yuan account with banks to facilitate yuan product trading in the future.
And Hong Kong's government has also said that existing rules already provide for the listing of stocks denominated in yuan.
That leaves just one final technicality, which is the collection of stamp duty by Hong Kong's Inland Revenue department, which only accepts local currency. An industry source said it is close to a solution on that.
"They are close to coming up with an agreement, and after that, things could move very quickly," the source, who declined to be named due to the sensitivity of the matter, said.
A likely outcome is that the Hong Kong exchange will collect the stamp duty from brokers in the local currency at a rate fixed by the Hong Kong Monetary Authority before 0300 GMT every trading day, the source said.
CITIC Securities, BOC International and HSBC Holdings Plc are involved in the deal, sources have told Reuters. ($1=6.636 Yuan) (Editing by Muralikumar Anantharaman)