Stocks slide as IPOs set to re­sume very soon

China Daily (Hong Kong) - - FRONT PAGE - By XIE YU in Shang­hai xieyu@chi­nadaily.com.cn

China’s eq­uity mar­ket slumped on Mon­day af­ter the mar­ket watch­dog said ear­lier that ini­tial pub­lic of­fer­ings will soon be re­sumed af­ter a hia­tus of more than one year, spark­ing fears of a pos­si­ble cap­i­tal drain. But many in­vestors are ex­pect­ing that a re­form aim­ing to let mar­ket forces play their role will help re­vive the slug­gish A-share mar­ket. Smaller com­pa­nies led the de­cline on Mon­day. The ChiNext In­dex, trac­ing stocks on the Growth En­ter­prise Board — China’s Nas­daq-style board — plum­meted by 8.26 per­cent, the big­gest drop since it was in­tro­duced in 2009.

The in­dex has surged 78 per­cent this year.

The bench­mark Shang­hai Com­pos­ite In­dex shed 0.59 per­cent, and turnover soared to 151.9 bil­lion yuan ($24.8 bil­lion), from 97.8 bil­lion yuan on the last trad­ing day.

The China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion an­nounced an IPO re­form plan on Satur­day and said about 50 com­pa­nies will be ready for IPOs by the end of Jan­uary. There are 760 com­pa­nies lined up for IPOs in China.

“Based on the an­nounce­ment, the pace of IPOs will ex­ceed mar­ket ex­pec­ta­tions in 2014. It will hit the Growth En­ter­prise Board in the short term, bring­ing the val­u­a­tions back to a more ra­tional zone,” UBS Se­cu­ri­ties said in a note on Mon­day.

But it will have lim­ited ef­fect on the main board, as IPOs are no longer the big­gest worry to the mar­ket, com­pared with re­fi­nanc­ing by listed com­pa­nies, the re­port said.

The reg­u­la­tory com­mis­sion also said it will push for­ward with a switch to a “reg­is­tra­tion-based” sys­tem, by which reg­u­la­tors will re­view ap­pli­ca­tions to en­sure that in­for­ma­tion dis­clo­sures meet re­quire­ments, leav­ing the mar­ket to judge a com­pany’s value and in­vestors the risks of buy­ing shares.

An­a­lysts said the news will spark mar­ket fluc­tu­a­tion in the short term. But the re­form will help clar­ify the func­tions of gov­ern­ment and mar­ket, and im­prove the eq­uity mar­ket in an all-round way.

China has halted new list­ings since Oc­to­ber 2012, when the reg­u­la­tory com­mis­sion started to crack down on fraud and mis­con­duct by some listed com­pa­nies.

Guan Qingyou, deputy head of Min­sheng Se­cu­ri­ties’ re­search depart­ment, said the 50 com­pa­nies “ready” for new list­ings have gone through strin­gent ex­am­i­na­tion by reg­u­la­tors and are con­sid­ered of “good qual­ity”. In­vestors are likely to di­vert their funds from ex­ist­ing eq­ui­ties to the new shares.

Some stocks, es­pe­cially those on the Growth En­ter­prise Board, may suf­fer short­term pain.

“New IPOs may drain cap­i­tal and cause a cor­rec­tion in some stocks that had been ris­ing this year,” Guan said.

But com­pa­nies with sub­stan­tial earn­ing ca­pac­ity will be more re­silient against the down­ward pres­sure, he noted.

Yang Delong, chief strate­gist at Nan­fang Fund in Shen­zhen, Guang­dong prov­ince, said the big in­dex jump for the Growth En­ter­prise Board this year is largely due to dis­torted sup­ply and de­mand.

“Mar­ket cap­i­tal­iza­tion of the listed com­pa­nies on the Growth En­ter­prise Board has swelled by 114 per­cent so far this year. Some com­pa­nies have seen their prices rise due to re­struc­tur­ing, merg­ers and ac­qui­si­tions, but still the room for share price rise has been over­stretched,” Yang said.

The re­sump­tion of IPOs may burst the bub­ble of the Growth En­ter­prise Board, he added.

Un­der China’s cur­rent sys­tem for IPO ap­proval, the reg­u­la­tor fo­cuses on whether a listed com­pany will be able to stay prof­itable. How­ever, in most de­vel­oped mar­kets, the reg­u­la­tor just en­sures that com­pa­nies meet cer­tain le­gal and fi­nan­cial re­quire­ments for IPOs, and leaves in­vestors to de­cide the com­pa­nies’ val­u­a­tions.

Some an­a­lysts have com­plained that it takes years for some com­pa­nies to get listed, while some State-owned en­ter­prises with poor per­for­mances can get ap­proved for list­ing.

The fi­nan­cial sec­tor ral­lied on Mon­day, as in­vestors ex­pect re­sum­ing IPOs will boost fees for bro­ker­ages and ease bank fund­ing.

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