How will the latest lifting of Initial Public Offering (IPO) listings in China impact the domestic financial markets?

The Chinese Securities Regulatory Commission (CSRC) announced on November 30, 2013 that it has lifted the one-year old IPO ban that might see the injection of potential market liquidity into the domestic financial markets. This latest announcement of comprehensive reforms form part of the November 15, 2013 Chinese Communist Party (CCP) communique on broader market reform measures that will gradually be introduced in the next coming decade.

Currently, there are approximately 50 companies that are expected to complete their IPO approval process, and the latest announcement might have an impact of fast tracking their approval process to as early as January 2014. According to a December 02, 2013 Bloomberg.com news article, there is a backlog of more than 760 companies that are in the queue waiting for the necessary audit process to be completed.

The Dec. 02 Bloomberg.com news article pointed out that in 2010, at the height of the Chinese stock market boom, the IPO market has attracted investments totalling approximately USD 71.0 billion. However, with the one-year moratorium on public listings issued by the securities regulators, there have not been any IPO launches since October 2012. At that time, the rationale for a total ban issued by the CSRC was to ensure that companies undergo thorough reviews of their internal controls system, and be able to demonstrate complete market transparency in all disclosures being made to the appropriate regulators and investors. The move was also in response of the various controversies surrounding corporate malfeasance among many corporate directors, and skirting various listing rules in order to profit themselves personally at the expense of investors, and shareholders. The corporate crackdown has also resulted in the IPO market being ‘dried up’, and this led to the lack of market liquidity in the Chinese stock markets. According to data obtained from Thomson Reuters, the Shanghai Composite Index (SHCOMP) year-to-date (YTD) performance is down at a negative 2.14 percent, and the CSI 300 Index is down by approximately 3.33 percent, versus Hong Kong’s Hang Seng Index (HSI) which was up by approximately 5.40 percent for the year.

With the lifting of the latest IPO ban, there are questions of whether there will be a return of the IPO frenzy we’ve seen in 2010. The question is about gauging the level and amount of interest being expressed by investors who were caught up with the lack of corporate disclosures, and have lost a substantial amount of their capital as a result of the various corporate wrongdoings. Alibaba.com, one the second-largest online retailer and marketplace after US-based Amazon.com has chosen to list their stock in the United States, rather than the domestic markets like China, or in broader markets like the Chinese territory of Hong Kong. Although the choice of listing venues is part of management’s decision, it does indicate somewhat the level of apprehension and unease over corporate governance among investors who are seeking for growth opportunities in China. Other factors including regulation arbitrage, lack of consistency in securities laws, and regulations do play a part in the management’s decision on whether they should list in the domestic markets like China.

According to the Dec. 02 Bloomberg.com news article, the one-year ban has resulted in Chinese companies seeking for alternative capital financing activities, including borrowing via the debt markets, and resorting to tapping into the so-called ‘Shadow’ banking (wealth-management products, informal borrowing/lending alternatives) routes in order to seek for the lowest mode of financing their capital expenditures. The latest announcement of the lifting of the IPO ban might ease off some of financing costs incurred, but is unlikely to end ‘Shadow’ banking completely as such activities, despite months of crackdown by the Chinese banking authorities, have not made much difference to the fortunes of finance companies that are actively participating in this market, and management of these finance companies have not seen any downturn in demand among Chinese corporations seeking to source for capital using the ‘Shadow’ banking routes.

Market observers interviewed by Bloomberg.com have expressed mixed views regarding the latest announcement by the CSRC to lift the IPO ban, with some citing that the move is good news for companies who are seeking for market expansion, and will like to broaden their outreach to a broader group of investors. Most of them have expressed their apprehension over whether it is going to make much of a difference to the Chinese financial markets, as liquidity has now gotten more constrained due to the lack of access to government funding that will help to prop up the economy. Premier Li Keqiang has earlier outlined that the new administration will like to see more private sector involvement in driving the economy forward, rather than active government involvement. The potential for short-term shocks to the financial markets is also seen as a potential disruption to the Chinese markets as the 50 companies that are slated to list in January 2014 might drain capital, and forced a correction in some inflated stocks. This potential issue was published in the Dec. 02 Bloomberg.com new article when it interviewed Mr. He Zongyan, who is currently serving as an analyst for Shenyin & Wanguo Securities based in Shanghai. It could also been seen as a healthy correction, and ensuring that the so-called ‘sham’ companies are being rooted out, in place for companies that are able to demonstrate market transparency.

Overall, the lifting of the IPO ban in China is seen as a welcome move because it brings about tight quality standards being enforced on companies seeking for listing status in the domestic markets, but there are still questions whether it is going to make any difference to the Chinese stock markets as the dynamics of the financial markets have shifted, the current slowdown in the global market economies, and many Mainland Chinese companies have a more variety of capital raising ideas, including foreign and through the ‘Shadow’ banking products/services that are available as compared to last year.

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

LEAVE A COMMENT