How will restarting the Initial Public Offer (IPO) market in China boost trading volume and attract interested investors?

Bloomberg News Online reported on November 04, 2013 that following the four-day Chinese Communist Party (CCP) third plenum meetings scheduled to start this coming Saturday, November 09, 2013, Chinese policy makers are expected to announce their approval for the restart of the IPO launches. The information was disclosed to Bloomberg News by one of the nation’s largest securities brokerage company, Citic Securities.

How did the regulations come about in the first place? Chinese securities regulators have imposed a temporary ban on IPO launches since October 2012 due to concerns over market irregularities, insufficient disclosures by companies heading into their IPO launches, lack of transparency in the financial statements by these companies, among others. The regulators have vowed not to revoke the temporary ban until companies, and potential IPO candidates tidy up their financial disclosures, and restore investor confidence. The Shanghai Composite Index (SHCOMP), which plunged to the lowest levels for four years in June, have since rallied approximately 10.0 percent, however, in terms of relative comparison with Hong Kong’s Hang Seng Index (HSI), the SHCOMP still lags behind HIS’s year-to-date (YTD) increase of approximately 2.0 percent to 3.0 percent. According to data obtained from Thomson Reuters, the SHCOMP is down by approximately 5.0 percent to 6.0 percent YTD.

With the lacklustre stock market conditions in China, one of the questions investors might ask is whether the kickstart of the Chinese IPO market will make any difference in attracting additional investor interest, and will the Chinese securities regulators ever rein in on the stock markets in the future, and impose similar bans? These are valid questions that any investor will want to know given that in the first place, there is an established historical record showing the lack of consistency and transparency over the enactment of new regulations that are also coming from the Chinese regulators themselves. Investor confidence has been severely impacted by the temporary ban in October 2012 and the volatility caused by the recent spikes in the Chinese interbank money markets (Shanghai Interbank Offer Rates, or SHIBOR) due to the lack of timely interventions by the nation’s central bank, the Peoples’ Bank of China (PBOC) to calm the markets. Given the lack of confidence among investors on any financial markets, and the increase in mistrust over the level of transparency, why will any investor be interested in putting his or her money when they are not sure whether the next day or a few months down the road, their investment capital could easily be wiped out or being locked up due to the lack of proper advance notification coming from the Chinese regulators. Although Chinese stock valuations have been driven much lower, with some stocks trading at 1.0 times to 2.0 times earnings, I doubt that ‘cheap’ valuations alone will ever attract much investor enthusiasm. This could be seen as a challenge for Chinese securities regulators, and other policy makers to tackle with as they try to embark on crafting new regulations that seek to enhance transparency, and hopefully generate more investor interest.

In the Nov. 04 Bloomberg news article, it quoted an analyst at Zheshang Securities Co. in Shanghai as saying that smaller company stocks may be affected when the IPO ban is eventually lifted. One of the reasons cited by the analyst was with the potential lifting of the ban; this could exacerbate the fear of tight liquidity. The smaller companies listed on the ChiNext Index (an alternative stock index comprising of mostly small-capitalisation (cap) stocks, or equivalent to the Wilshire 5000 index or the Russell 2000 index in the United States) have been underperforming relative to their bigger counterparts due to the high valuations, as money will be channelled to new companies. The Chinese government is facing a dilemma on how to ensure order in the financial systems. The recent events impacting the direction of the Chinese markets have not been quite satisfactory among the investor community, especially at a time when investor confidence is needed the most due to the multiple episodes of turbulences we have seen taking place in the global financial markets.

In conclusion, I think that what is needed the most is for the Chinese securities regulators and policy makers to work together with the larger investment community in seeking for solutions on how to restore investor confidence, rather than ignoring the investment community altogether by enacting draconian measures that cause unnecessary harm to the already weakened financial system. With the opening up of the Shanghai Free Trade Zone (Shanghai FTZ), and allowing foreign financial institutions to set up shops in the Free Trade Zone, I believe that a higher order of transparency is needed urgently in order to attract local and foreign investors who are seeking for liquidity, and most importantly transparency in the Chinese financial system.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc