News analysis

China to resume IPOs by year end as markets stabilise

The resumption of initial public offerings will help Chinese firms tap an important source of financing as they seek to cut debt levels from near-record highs.
The resumption of initial public offerings will help Chinese firms tap an important source of financing as they seek to cut debt levels from near-record highs.PHOTO: REUTERS

BEIJING • China will lift a freeze on initial public offerings (IPOs) by the end of the year, removing one of its key measures of support for the stock market as equities recover from a US$5 trillion (S$7.1 trillion) rout. New share offerings will restart after improvements to the listing system, Mr Deng Ge, a China Securities Regulatory Commission (CSRC) spokesman, said at a briefing in Beijing.

Resumption of IPOs, suspended in July, suggests the authorities are becoming more confident the stock market can stand on its own after the Shanghai Composite Index rallied back into a bull market last week.

The move will also help Chinese companies tap an important source of financing as they seek to cut debt levels from near-record highs.

"There will be short-term damage to sentiment in the market," said Mr Ronald Wan, Hong Kong-based chief executive officer at Partners Capital International.

"But the government has to proceed with market reform and the timing for IPOs will be better now than next year as the market seems to have some strength."

The announcement came after signs that Chinese stock markets have finally stabilised after a rocky summer.

Last week, the CSI300 index posted its best weekly performance since June.

Mainland stock indexes were up from the bottom of a crash that struck in August, with the Shanghai Composite climbing 1.9 per cent to its highest close in 11 weeks last Friday before the CSRC announcement.

It has gained 23 per cent since its Aug 26 low, technically marking a return to a bull market.

Said Guodu Securities analyst Xiao Shijun: "This is good news for the stock market in the mid to long term as it will introduce fresh cash, though it will also bring some psychological pressure to investors as they are afraid of diversion of the cash in the short term."

The stock market crash over the summer was partly blamed on a spate of IPOs hitting an already frothy and heavily leveraged market.

Firms in China had raised US$23.4 billion in IPOs this year through mid-June before regulators suspended deals, far surpassing the US$13.2 billion in all of last year, Thomson Reuters data showed.

At one point, CSRC was letting 40 companies list every week and there were even more secondary issuances.

"I don't think the resumption will cause a market stampede again," said Guodu Securities' Xiao.

"In June, the fundamentals were distorted by high leverage, which does not quite exist in the current market after the regulator's aggressive moves."

Shanghai's Haitong Securities analyst Zhang Qi said he expected retail investors to be sceptical of how much they will benefit from the resumption of IPOs, which were highly distorted by pricing restrictions and other policies.

"I am also expecting further changes to IPO rules, including to the quota for major stakeholders' share of subscriptions," he added.

CSRC has said it would migrate from its current approval system for IPOs to a system in which companies merely register to list without requiring regulatory clearance. However, rules aimed at preventing insiders from fleecing investors suppressed IPO pricing, unintentionally creating an easy profit for those investors able to subscribe. Nearly every listing in China rose by the maximum allowable 44 per cent on the first day, and most went on to rise into triple digits in the following weeks.

As a result, IPOs were oversubscribed by an average of 130 times, and the escrowing of cash by aspiring subscribers temporarily sucked trillions out of the money markets and distorted interest rates.

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A version of this article appeared in the print edition of The Straits Times on November 09, 2015, with the headline 'China to resume IPOs by year end as markets stabilise'. Print Edition | Subscribe