Scott Murdoch and Samuel Shen, Selena Li

SYDNEY/HONG KONG – The regulator for China’s financial markets has banned the banks that it oversees from promoting Hong Kong blank-check businesses, according to three sources with knowledge. It is a move which could prove lucrative.

According to sources, China Securities and Regulatory Commission (CSRC), has made the move. It was informed to mainland banks in January due to concerns about the potential risk associated with such vehicles.

Sources say that while the promotion of these deals will not be permitted, investment banks will still be allowed to advise on transactions involving special purpose acquisition companies (SPAC) under Hong Kong’s new listing rules.

People spoke under the condition of anonymity because the directive was not publicly available.

China will soon announce final rules to increase offshore capital by its domestic enterprises. As part of this, regulators plan to put additional scrutiny on investment banks.

Sources said that promoters have been granted to Mainland-affiliated banks, which are regulated under the China Banking and Insurance Regulatory Commission. This gives them a competitive advantage.

According to one source, Chinese brokerages lobby the CSRC to modify the rules so they can also be promoters.

CBIRC and CSRC didn’t immediately reply to our requests for comment.

SPACs (shell, or blank check) companies that are funded by an initial public offering (IPO). Proceeds of the IPO are kept in a trust so they can merge with a private firm and make it public.

Hong Kong’s promoters function in the same manner as those in other markets: they set up the SPAC and issue their promoter shares by the blank cheque company.

Promoter stock is more expensive than the shares of public investors. This allows them to secure higher future profits.

Sponsors are permitted in America by investment banks, with Goldman Sachs (NYSE 🙂 being one of the few that have set up their own SPACs over the past 2 years.

While the SPAC rules in Singapore don’t prohibit investment banks from being sponsors of the SPAC, bankers state that the SPAC regime requires such sponsors to have experience and high quality sponsors. This is unlikely to attract investment banks or brokerages.

According to filings on exchanges, Hong Kong’s asset management arm of China Merchants Bank International and Agricultural Bank of China International (OTC) International (ABCI) acted as SPAC promoters.

According to the Hong Kong stock market website, eight SPACs were created in January.