Home' A Plus Magazine : July 2013 Contents After a moratorium imposed last
year, and a consultation on reforms,
financial markets expect initial public
offerings in the Mainland to resume
soon. George W. Russell finds out
what awaits investors
When China's IPO watchdog suspend-
ed initial public offerings last year,
it pulled the rug from under a lot of
companies planning to list -- as well
as bankers, brokerages and investors.
Now that Chinese authorities ap-
pear to be on the verge of giving the green light to IPOs, there are
doubts over whether the market is ready for them.
Last month, Chinese media reported
that Yao Gang, a China Securities Regula-
tory Commission vice-chairman, had told
representatives of major brokerages that
he wanted to see IPOs resume, but at low-
er issue prices and with fewer post-listing
prices and profits plunges.
The China Securities Regulatory Com-
mission froze new listings in October
2012 after the benchmark stock index fell more than 5 percent in
the first three quarters of last year, suspecting the quality of new
entrants was at least partly to blame. (More than a third of the 154
companies listed last year experienced a decline in profits within
the first three quarters of their listings.)
Some analysts believe that if the CSRC does start allowing new
listings again, the backlog could mean as many as eight to 12 IPOs
a week could list. "If market sentiment improves and the regula-
tor resumes IPO approval from September, there may be as many
as 135 to 180 IPOs in 2013," says Terence Ho, China strategic
growth markets leader at Ernst & Young in Hong Kong.
However, the effects of China's liquidity crunch -- such as the
recent surge in interbank lending rates and recent stock market
volatility -- are likely to dampen demand for IPOs. "There might
be room to loosen monetary policy, but such action is unlikely,"
Ho cautions that fixing China's capital markets is more critical
than whether regulators would extend the moratorium or resume
IPOs. "If investor confidence is weak, resuming IPOs is likely to
trigger another plunge in the stock market," he says.
Experts point to China's lagging market fundamentals as the
main concern. A recent BNP Paribas report noted China's poor
legal framework and enforcement, poor investor protection and
lack of effective government oversight.
The report noted that despite China's high economic growth, the
Shanghai Stock Exchange Composite Index has performed below
the S&P 500, MSCI Emerging Mar-
ket, Euro STOXX and H-share index
of Mainland companies traded on the
Hong Kong stock exchange.
Lack of liquidity
There are, however, signs that inves-
tor demand for Chinese companies
remains. Two issuers -- China Galaxy
Securities Co. and Sinopec Engineering (Group) Co. -- raised more
than HK$20 billion in Hong Kong in May, while electronic com-
merce company Light In The Box completed a US$79 million IPO on
the New York Stock Exchange on 6 June.
Whether domestic IPOs can thrive remains to be seen, given last
month's share sell-off that saw Mainland stocks fall 8 percent in the
third week of June.
The dent in investor confidence that triggered the slide is bad
news for Chinese underwriters and corporate financiers who had
been hoping for a resumption of new listings.
"There is insufficient liquidity in the [Mainland] market,
which will not be able to digest the IPOs even if companies get
approved," the head of one Shanghai brokerage told the Chinese
business magazine Caixin last month.
The CSRC hopes its proposed reforms of the IPO process, pre-
sented in a consultation draft published on its website on 7 June,
will give markets a much-needed fillip.
The agency is "expected to improve the quality of new IPO
Illustrations by Alan Ho and Jackal Tam
"If investor confidence
is weak, resuming IPOs
is likely to trigger
another plunge in
the stock market."
July 2013 15
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