Trading cap end unlikely in short term

While removing the trading cap on the limit on how much a stock can gain on its trading debut adds some positive signs to further reforms of China’s capital market, the move is not likely to take place in the short term as the Chinese mainland stock market is not yet fully mature.

Yang Delong, chief economist with Qianhai Open Source Fund Management, said removing the maximum permissible limit on the first day of trading is necessary and will become a significant step forward in the market reform of the IPO pricing scheme and alleviate the significant fluctuation of stock prices.

“The current limit only works on the first trading day and yet does not help to reflect a reasonable priceearnings ratio afterward — shares often climbed too quickly days after companies made their debut,” he said.

The remarks came after a senior official with the nation’s top securities regulator discussed such a move.

“We should study and consider the possibility of removing the first day trading cap for new stocks, because pricing restrictions of such a kind cannot accurately reflect the price of the shares with low trading volumes in the first couple of days,” said Fang Xinghai, deputy head of China’s Securities Regulatory Commission, during a forum held over the weekend.

The rule came into force in 2014. The limit is set to prevent speculative behavior and yet did not help much as speculators could mobilize the stock prices to rise to unreasonable high levels using a small amount of capital, disturbing market liquidity.

Some analysts said they expected more reform steps were needed before removing the trading limit.

Song Qinghui, an independent economist, said a sudden move to remove the cap would cause market instability at the time when the market is dominated by retail investors and lacks sufficient regulations for information disclosure.

“More efforts to improve market regulation are needed before taking the step to remove the trading cap,” he said.

Echoing his remarks, Qin Peijing, a strategist with Citi Securities, said the current limitation remains a key protective measure for retail investors.

The skyrocketing of stock prices on the first trading day has to do with distorted pricing schemes, he said.