Equity markets in Hong Kong and the US have both caught China IPO fever helped by an expectation among cash-rich global investors that the country’s economy will continue to grow at a high rate. However, that enthusiasm is not at all felt in China's own markets.
The Shanghai Composite Index (SCI) fell 10% in the week after Beijing announced its first rate hike in three years in mid-October as part of its battle against inflation. Indeed, consumer price inflation rose to an alarming 4.4% in October, exceeding the government's tolerance level of 3%. Several major cities have introduced price controls and companies from various sectors have been ordered not to raise prices, or to run operations at a loss in the interest of the nation.
And, on Friday, the People's Bank of China (PBoC) raised the reserve requirement ratio (RRR) for banks for the second time in two weeks -- a move made to take decisive control of excessive liquidity in the economy. The PBoC said on its website that it will increase the level of reserves that banks are required to hold by 50 basis points in order to “strengthen liquidity management and appropriately control money and credit issuance".
In light of these measures, market watchers believe Shanghai-listed stocks will remain volatile in the coming months, discouraging companies from raising fresh capital from the country’s major stock exchange. “We are having a big correction period. The market will continue to look weak in the coming two months, [and] whether things will improve will depend on the central government's upcoming monetary policies,” said Li Jun, a Shanghai-based analyst at Central China Securities.
“The A-share market will look especially bleak in the fourth quarter of next year because the impact of the tightening policies will be reflected in the market by then,” said Fang Fang, managing director of J.P. Morgan China.
Even though China is boasting the fastest growth among global economies this year, Chinese stocks dropped 26% in the first half of 2010, ranking the mainland markets among the world's worst performers. They recovered some losses in the third quarter, but have remained volatile in the fourth.
Shanghai IPOs, which were once a favourite bet for mainland investors, have reflected the pessimistic sentiment since the third quarter. The latest major IPO -- a Rmb7.4 billion ($1.1 billion) offering by Ningbo Port in mid-September -- received lukewarm demand despite the fact that Ningbo is a state-backed enterprise, something which would otherwise typically make for a popular investment target.
Ningbo, which is one of China's largest port operators, cut the size of its IPO by 20% from the original target due to the volatile market. It sold 2 billion new shares, down from a previously planned 2.5 billion, at Rmb3.70 apiece. The shares fell 4% on their first trading day in late September and, while they reached a closing high of Rmb4.18 a month ago, last Friday they were back below issue price again, at Rmb3.66. A domestic competitor of Ningbo's, Tang Shan Port, also fell to below its IPO price in its debut in early July.
However, in the overseas market, the story is very different. Chinese companies seeking listings in the US or Hong Kong at around the same time as Ningbo received strong demand.
Chinese IPOs in general are also among the best performers in the US. The operator of China's largest property website SouFun Holdings and Chongqing-based restaurant chain Country Style Cooking soared 73% and 47%, respectively, in their September trading debuts on the New York Stock Exchange. And most mainland issuers in Hong Kong have seen their shares heavily oversubscribed by investors.
Year-to-date there has been 20 IPOs in Shanghai, raising a combined $25 billion. Half of the top 10 listings in Shanghai were completed in the first quarter of 2010, according to statistics from Dealogic. Meanwhile, in Hong Kong, there were 78 new listings in the first 10 months of this year, raising a total of $44 billion, according to data provided by the Hong Kong Exchanges and Clearing.
Central China's Li believes Hong Kong will remain a preferred destination for mainland companies in urgent need of cash, as the regulatory environment on the mainland means Shanghai listing candidates may wait more than a year before they get the nod from the authorities to kick off their share offerings.
