IPOs may be halted to stabilise China stock markets

Chinese stocks are down 20 per cent from their peak earlier this month, a trend labelled by the China Securities Regulatory Commission as a normal correction to over-valuations in the market.
Chinese stocks are down 20 per cent from their peak earlier this month, a trend labelled by the China Securities Regulatory Commission as a normal correction to over-valuations in the market.PHOTO: EUROPEAN PRESSPHOTO AGENCY

SHANGHAI - Chinese regulators are considering suspending initial public offerings (IPOs) to stabilise the country's tumbling stock markets, people familiar with the matter said.

The China Securities Regulatory Commission (CSRC), which allowed 24 IPOs to raise around US$6.5 billion (S$8.8 billion) from the markets since June 14, is meeting with major brokerages, said another person, without saying what will be discussed.

Halting IPOs would head off any diversion of funds into new listings and would come on top of a weekend interest rate cut that was viewed by some analysts as a move to curb Chinese equities' plunge into a bear market and restore investor confidence.

"Suspending IPOs will definitely provide some support to the stock market," said Mr Zhang Yanbing, a Shanghai-based analyst at Zheshang Securities.

"There have been a lot of IPOs recently, including several really big ones, putting pressure on market liquidity."

A 20 per cent fall in Chinese stocks over the past two weeks was mainly blamed on a flood of IPOs, highlighting the risks that regulators face as they try to use the stock market to support the slowing economy.

Key indexes fell more than 7 per cent last Friday, the biggest one-day fall since the global financial crisis. The Shanghai Composite Index dropped 3.3 per cent yesterday, taking declines from its June 12 peak to more than 22 per cent.

Overall, Chinese stocks are down 20 per cent from their peak earlier this month, well into technical correction territory.

The CSRC said last Friday that the fall was a normal correction to over-valuations in the market, a day after it approved the IPOs to hit the market in the next two weeks. CSRC officials did not immediately respond to a faxed request for comment.

Keen to clear a massive backlog of IPOs created during an over-year-long freeze in 2013, the CSRC doubled the pace of IPO approvals to around 20 a month in January, then doubled it again to more than 40 a month since April. It permitted an even greater pace of secondary issuances by already listed companies during the first half of this year, resulting in proceeds of more than US$70 billion, double the amount raised in all of last year.

The 175 initial share sales in China this year have raised about US$22.7 billion, according to data compiled by Bloomberg.

By allowing companies to raise fresh funds with high valuations, either via IPOs or secondary issuances, China can support growth and drain excess speculative liquidity flowing into the market through a surge in margin financing. However, the balancing act is tricky because the latest slew of IPOs temporarily locked up over US$1 trillion in funds, one of the causes of the market freefall.

China's securities regulator has suspended IPOs eight times in the history of the yuan-denominated A-share market, five of which have been imposed since 2000, according to a Xinhua News Agency report in April 2013.

The last moratorium was imposed in late 2012 and lifted in December 2013 as the regulator revised IPO rules to better protect individual investors from fraud and misconduct among advisers and issuers.

Government action helped the Shanghai gauge surge more than 150 per cent in the 12 months prior to its June 12 peak as the authorities cut trading fees, made it cheaper to open new stock accounts, expanded investment quotas for overseas money managers and eased rules on margin lending. They also lowered interest rates three times before last weekend and reduced lenders' reserve requirement ratios twice.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on June 30, 2015, with the headline 'IPOs may be halted to stabilise China stock markets'. Print Edition | Subscribe