On Thursday, the Shanghai composite index ended at 1390.5, down almost 50 points on the day and way below the 1500 market that for months has been touted as a powerful resistance point. The immediate cause was the reaction to China Merchants bank's plans to issue a huge RMB 10 billion ($1.2 billion) convertible bond and the aftermath of the almost RMB 6 billion IPO of Huaxia Bank.
The response by the authorities seems to be to focus on bureaucratic changes. The secondary offering issuance system, for example, has already seen some changes, and there are rumours the clogged up IPO system could also see some changes.
However, it is hard to see how these measures can solve the main problem of the market, say observers: the rotten, state-owned companies that dominate the boards.
At the moment the guiding principle of follow-on offerings, stipulated by the China Securities Regulatory Commission, is geared to helping existing holders of the A-shares.
The process is a called a 'rationed sale' since investors can't freely buy as many shares as they wish. Investors must apply for shares through a lottery system, and only a fraction of applicants get the shares they desire. Depending on investor and regulatory requirements, between 50% and 100% of new shares are allocated to existing investors, with the remainder offered publicly on the Internet.
"In the past, you could increase your chances of being allocated shares according to how much money you put down. That system has now been changed in favour of existing investors, since you may apply for an addititional 1000 shares for every 10000 RMB in shares of the company you already own. That is supposed to prevent speculators dominating the action and rewards existing shareholders," explains Chen Dan, an equity specialist at privately-run merchant bank ChinaEquity.
Some bankers complain that this is another example of how CSRC reforms have kept money out of the market, since it makes it more difficult to buy shares. Consequently, there have been calls for a limited re-introduction of the old system, whereby investors could increase their chances of buying shares depending on how much money they put down.
Others point out that the rate at which investors get shares through the lottery system is too low, diminishing investor appeal. "In a free float of say, 30 million shares, for example, only 0.4% goes to investors in the lottery system, compared to 0.7% on a float of 20 million shares under the old system," says ChinaEquity's Chen.
Add that to a declining market, bank deposit rates at a stable 1.98% for one year, and observers say it is not surprising less money is going into the market.
In any case, tinkering with the issuance process does not solve the problem of the stock exchange being dominated by loss-making companies.
Although companies have a tendency to IPO in - at least, apparently - acceptable financial health thanks to the ministrations of the underwriters who nurses it through their pre-IPO restructuring, their performance is increasingly dire.
According to stock market statistics, the average profit per share of companies listed this year came in at RMB0.0026 for the first half of this year, compared to RMB0.123 for newly listed companies during the same period last year. Of the 46 companies that listed this year, 20 have seen their profits slide and the profits of the group as a whole are down 97% on the same period last year.
Southern Airlines is just one new stock that has announced huge losses.
The CSRS is again looking at bureaucratic methods to address this problem. One measure being touted is for the securities houses to 'recommend' or 'sponsor' a stock. This essentially involves the underwriter being held responsible for any 'faults' committed by the listco, defined, for example as raising fund from the market which are 50% or more of the value of the company's total assets, or raising funds in a greater amounts than the company had promised at the time of its listing.
Other areas where the underwriter has to keep an eye on the company it has sponsored for a listing are attempts by manager or large shareholders to appropriate company funds for their own use.
Another measure is linked to the 'channel' system, whereby securities houses are permitted to sponsor companies for primary and secondary share issuance in a manner limited by the size of the security company. In effect, it is a quota system, to restrict the number of companies appearing on the already extensive waiting list handled by the CSRC. The eight biggest securities companies - out of over 130 - can simultaneously sponsor 10 companies each in one year. 57 of the biggest houses have a total of 257 channels at their disposal - the second tier houses have six channels, and the smallest houses just two, although the latter find it hard to win business.
However, these channels only resulted in 38% of the companies in the channels succeeding in issuing share last year, according to research by ChinaEquity.
That is related to the numerous companies who are at various stages of their listing process. Some 110 companies have already been approved by the CSRC and are waiting for a time to issue. A further 200 companies are waiting for CSRC approval, 70 of which are planning to IPO following their 'tutoring' and 1200 companies are undergoing the same tutoring process to issue shares for the first time with their prospective underwriter - a process which can last three years.
Of the 110 companies that are simply waiting for the date to IPO, at least 20% will not be able to this year, going on the issuance rate last year, when 90 companies IPO'd.
These issuance-related problems have led to a somewhat strange proposal: that smaller IPOs get sold in one batch through one channel.
That process, it's been rumoured, has been linked to the Shenzhen stock exchange being given permission to once again allow IPOs, after a long hiatus. From the point of view of the securities companies this would improve the usage rate of their channels and accelerate the number of companies listing per year.
From the issuers' point of view, it would have the advantage of speeding up their access to the capital they need. It would also spread out the capital more evenly: under the channel system, securities companies naturally select the biggest companies they can find. But this starves the smaller companies of access opportunities. A variant on this scheme would be to announce a quota of say, RMB one billion, and then later divide the quota among a number of smaller companies, to be named when a listing date was convenient.
Up to July this year, 39 companies had IPO-ed, raising RMB 20.6 billion, compared to RMB 27 billion last year for the same period. What makes the channel idea interesting at this point, is that many of these companies are relatively small caps.
While the average amount raised was RMB 530 million, 36 companies issued less than 100 million shares. It's precisely this group which would benefit from the package system.
"The CSRC's aim is to control the pace of the listings. The package system, which is only a rumour so far, would allow speedier access for the smaller companies. On the other hand, if the fundamental problem of unprofitable companies isn't solved, the listing of too many poor companies will hurt the secondary market," estimates SK Lin, China International Capital Corporation's head of equity market.
Nor is he sanguine about the sponsoring securities house being held accountable by misdeeds committed by the client.
"They are our clients. How can we fire our clients?" he says.
What's clear is that China's stock markets, which is declining on metrics, all compared to previous years, will need many further changes before they begin to operate in a manner which contributes efficiently to the economy. The alternative, already being spoken about in whispers, is marginalization.
