Hong Kong IPO Ecosystem Restructuring, Cracking Down on Underground Chains

After new Hong Kong-listed stocks debut, if they cannot quickly be included in the Stock Connect (meaning being incorporated into the Hong Kong Stock Connect), mainland investors are likely to wait a long time and pay higher costs to invest in their preferred companies. However, as more A+H shares achieve first-day inclusion, the investment ecosystem for mainland investors is changing.

On August 4, 2025, the Hong Kong Stock Exchange officially introduced a new issuance allocation mechanism, replacing the previous mandatory clawback system with “Mechanism A” and “Mechanism B.” The core logic of the reform is to give institutional investors a greater role in pricing—“Mechanism A” continues the traditional approach but reduces the clawback cap from 50% to 35%, while the new “Mechanism B” allows issuers to directly lock in the international placement shares, and the proportion of public offering quotas no longer varies with retail subscription enthusiasm.

As of March 19, 2026, 28 new stocks have been listed in the Hong Kong market since 2026, raising a total of HKD 97.166 billion. Among them, 13 companies listed both A shares and H shares, raising HKD 62.577 billion.

A significant market change is underway: more and more dual-listed new stocks are abandoning the “Greenshoe” over-allotment option and opting for first-day inclusion in the Stock Connect. This trend not only reshapes the IPO ecosystem in Hong Kong but also creates new opportunities for mainland investors to invest in Hong Kong stocks.

In the early hours of the 12th, Jingshi Zatan first reported on insider trading involving Chinese-funded brokerages and hedge funds collaborating to harvest retail investors. According to public information, authorities in Hong Kong raided CITIC Securities’ Hong Kong subsidiary and Guotai Junan International’s Hong Kong office. This incident has now revealed a new dark side of the Hong Kong IPO market.

At noon on March 12, the ICAC and Hong Kong Securities and Futures Commission announced that the operation mainly targeted insider trading and corruption, searching 14 locations and arresting 6 men and 2 women aged between 35 and 60. Among them, Guotai Junan Securities’ Stock Market Department head Samuel Pan was taken in for investigation.

The hedge fund involved in the insider trading is Infinite Capital, which gained approximately HKD 315 million in illegal profits from this activity. Senior executives of involved brokerages received bribes exceeding HKD 4 million. Tony Chin, founder of Infinite Capital, previously worked at Morgan Stanley and HSBC, started trading in mainland China in 2011, entered the offshore market in 2015, and attracted external funds in 2023.

Latest reports indicate that not only was Guotai Junan’s stock market head Pan taken away, but DBS Bank’s Fixed Income Vice President Shen Yin has also been suspended by the Hong Kong SFC. Shen Yin is married to Pan Jupeng.

Since 2025, Infinite Capital has participated in H-share placements through exclusive subscriptions, including Black Sesame Intelligence, Paradigm Intelligent, Weimob Group, GCL Technology, SenseTime, and China Ruyi. Infinite Capital is believed to engage in shorting certain stocks and then participating in buybacks through share placements.

According to Tencent’s “Qianwang,” an anonymous tip about a “bottom guarantee fund” for Hong Kong IPOs has circulated in Central, revealing a chain of black market activities behind Hong Kong IPOs. This has not been independently verified by “Qianwang,” but since the reform of the IPO mechanism in August 2025, incidents of “underwriting” have increased. Do you often find yourself unable to get allocated shares when investing heavily in Hong Kong IPOs? Have you noticed promising investment targets that, after listing, keep falling? While many Hong Kong IPOs are legal and compliant, some brokerages and investment groups may have deepened their involvement in IPO manipulations.

Underwriting to harvest retail investors involves two main schemes, both requiring full control of the underwriting: one is to aggressively push up the stock price after listing to meet the criteria for inclusion in the Stock Connect and then sell off, harvesting mainland retail investors; the other is not necessarily to enter the Stock Connect but still involves full control—after listing, the stock price is driven up sharply, then dumped en masse, again targeting retail investors.

Achieving first-day inclusion in the Hong Kong Stock Connect for new stocks is not without thresholds, primarily depending on listing type and mechanism design. According to listing rules, A+H shares are the main group eligible for first-day inclusion, which does not require meeting traditional metrics like market cap or turnover, only that the “Greenshoe” mechanism is not set, allowing inclusion on the listing day. If a “Greenshoe” is set, then the stock must wait until the stabilization period (usually 30 days) ends before being included.

Analysts point out that for companies, abandoning the “Greenshoe” mechanism to achieve first-day inclusion is a strategic choice regarding liquidity. While the “Greenshoe” can stabilize prices through underwriters, it also affects the trading data within the first 30 days, which regulators believe does not reflect true market supply and demand, requiring a waiting period before approval. Without the “Greenshoe,” the stock price from day one is fully market-driven, making the data more authentic for the Stock Connect review and attracting mainland funds quickly. This choice reflects issuers’ emphasis on liquidity, especially amid high P/E ratios in the Hong Kong IPO market, where mainland participation can boost trading activity.

According to the Hong Kong Stock Exchange Listing Rules Section 8.08, companies with expected market value under HKD 6 billion must ensure at least 25% public float; those with market value between HKD 6 billion and HKD 40 billion have a public float requirement decreasing proportionally from 25% to 15%; companies over HKD 40 billion can have a minimum public float of 10%, provided the market value of public float is at least HKD 4.5 billion.

The introduction of “Mechanism B” offers more flexible issuance options for such companies, expanding the listing channels. Data shows 467 companies are under review, with 21 approved by the Listing Committee and awaiting listing, totaling 488 companies queued.

For retail investors, the first impact of “Mechanism B” is an unprecedented IPO subscription frenzy.

Before the reform, higher subscription levels led to more international placement shares being allocated to the public via the clawback mechanism, increasing retail allocations and improving chances of winning. After the reform, the public offering quota is fixed and no longer varies with subscription enthusiasm, locking in the maximum retail share allocation.

Over the past six months, this has led to extreme situations—statistics show the median over-subscription multiple for IPOs under “Mechanism B” soared from 194 times before the reform to 1091 times, while the median success rate plummeted from 50% to about 1%.

This extreme imbalance between supply and demand causes initial stock prices to fluctuate wildly. The profit potential of “Mechanism B” IPOs was quite remarkable early on. Among the top 10 IPOs with the highest first-day gains since implementation, 9 used “Mechanism B,” with an average first-day increase of 53.6%. Notably, Nobi Kan (02635.HK) surged 363.8% on the first day, and Jinyie International (08549.HK) rose 330%.

Once rare “subscription kings” have emerged intensively within half a year. In October 2025, Jinyie International, with over 11,464 times oversubscription, set a new Hong Kong record. BBSBINTL (08610.HK) had a subscription multiple of 3,860 times during public offering, with a success rate of only 0.6%; Haowei Shares (09609.HK) received 4,310 times oversubscription, with a success rate of 0.8%; Kexing Technology (02543.HK), oversubscribed over 7,500 times, had a success rate as low as 0.02%.

With such slim chances, retail investors are forced to leverage to participate in this low-probability game. According to Tiger Securities, after the new system, the proportion of IPO investors using margin (financing) surged from about 70% before the reform to over 90%. The total margin trading volume on the platform in 2025 also broke historical records, surpassing HKD 1 trillion.

Overall, data from LiveReport shows that in 2025, Hong Kong IPOs received over 14 million subscriptions, more than 12 times the 1.055 million in the previous year.

The long decline after the initial surge—“Mechanism B” does not guarantee perpetual gains. The initial frenzy is often followed by a long-term valuation correction.

For example, Jinyie International (08549.HK), which surged 330% on its first day, fell about 75% within half a month, nearly returning to its issue price. BBSBINTL (08610.HK) soared 360% in the dark trading phase but by January 19, 2026, its price dropped to HKD 0.72, down over 78% from its peak. Bama Tea (06980.HK) rose 86.7% on debut but fell over 40% in three months.

This “peak on day one” pattern stems from the behavior of international placement investors under “Mechanism B.” While pricing power is handed to institutions, not all are long-term funds. Sovereign funds and some long-term institutional investors tend to hold based on industry logic and value, but hedge funds and trading-oriented players also participate heavily, betting on short-term gains and quick exits, resonating with retail speculative trading, creating a false prosperity on day one, and then selling off to generate ongoing selling pressure.

Nevertheless, fundamentally sound companies can still be favored in long-term trading. For instance, the innovative industrial company listed in November 2025 (02788.HK) opened at HKD 15.2, 38.3% above the issue price of HKD 10.99, and closed at HKD 14.59, up 32.8%. On the second day, the stock further declined to HKD 13.52, down about 7.3%. As the company’s fundamentals gained market recognition, the stock price continued to rise, reaching around HKD 28 by mid-March 2026, more than doubling from its 52-week low.

“Mechanism B” makes the initial pricing of new stocks more susceptible to short-term capital concentration and trading, increasing volatility in the short term (within days to a couple of weeks), often leading to extreme movements. However, over the medium term (three to six months), stock prices tend to revert to the influence of industry fundamentals, macro environment, and company quality. The myth of “day-one unstoppable rise” was shattered in October 2025.

Guanhetong (00638.HK) opened at HKD 21.5, equal to the issue price, but then declined, closing down 11.72% at HKD 18.98, breaking the record of 16 consecutive “Mechanism B” IPOs closing higher since the new rules took effect.

The peak of the “break issue” wave occurred in December 2025. On December 22, four new stocks—BenQ Hospital (02581.HK), Impression Dahongpao (02695.HK), Huansheng Biological (02396.HK), and Nanhua Futures (02691.HK)—all fell below their issue prices, with declines of 49.46%, 35.28%, 29.32%, and 24.17%, respectively. BenQ Hospital’s decline set a new record for first-day drops among Hong Kong IPOs in 2025.

A detailed look at these fallen stocks shows that overvaluation is a common trait. For example, Haowei Shares (09609.HK), which also used “Mechanism B” to lock in 10% of the public float, was oversubscribed 4,310 times with a success rate of 0.8%. Its fundamentals, however, are weak: in 2024, revenue was only RMB 422 million, less than one-tenth of industry leader Fara Electronic (600563.SH), with a market share of 10.9%, only a third of Fara’s. Its first-day P/E ratio was 42, well above Fara’s 28. Its stock fell 23% on debut, closing at HKD 11.

Similarly, Impression Dahongpao (02695.HK) experienced a sharp reversal after an initial high open of 66.7% in dark trading, ending the first day down 35.28%. This reversal was not accidental—its interim 2025 net profit declined 19.35% year-over-year, indicating ongoing deterioration in fundamentals that was quickly reflected in the market.

The December 2025 collective “break issue” was caused by some companies rushing to list during the window period with aggressive pricing strategies, mismatched with market capacity. In December alone, over 20 new stocks listed, hitting a monthly peak since “Mechanism B” was introduced, creating significant short-term supply pressure (from Fengda Capital official account).