Stocks slide as IPOs set to resume very soon
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.