China this month lifted a short-lived ban on initial public offerings. The IPO ban was imposed in July amid a massive state-led effort to prop up the stock market, and scrapping it is an attempt by Beijing to return to the vision of President Xi Jinping for markets to play a decisive role in the economy.
But investor sentiment remains wary. The July market crash wiped $2 trillion off share prices in less than a month.
Worse than the collapse was the government’s response, which went beyond using foreign exchange reserves to prop up the market. At one point half of China’s listed stocks were banned from trading and a crackdown on mis-selling ensued – one that has humiliated securities regulators, hedge fund managers, bank executives and journalists alike.
So China has a credibility problem.
Opening the IPO spigot is welcome but without complimentary reforms, it puts the regulators’ reputation at further risk. A brief rally followed by another tumble would only cause domestic and foreign investors to lose confidence. Yet recent history suggests this is what will happen.
The 2015 IPO ban is in fact the sixth time that IPOs have been suspended. In those cases, restarting the IPO process triggered short-term rebounds but not sustainable rallies. If anything, the new supply of listings served to ultimately put an end to bull runs, according to analysts at GF Securities.
This time around, Beijing has given the green light to just 28 companies in the long queue to go public; more will follow. The market’s two biggest shareholders, state entities China Securities Finance and Central Huijin, are among the top-10 shareholders of nearly 50% of A-share companies. In the summer they bought en masse, with six-month lockups. If market valuations return close to par, they are likely to embark on block sales.
Macro economic data is also against a drawn out rally. The latest figures show China’s slowdown is deepening and the administration’s growth target of 6.5% looks increasingly debatable.
Meanwhile investors are once again pushing up share prices in the hope more reform will quickly follow. However key changes such as moving from a regulatory approval system for IPOs to registration requires amending the Securities Law, which will take time.
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