Beijing suspended new share sales over the weekend to “stabilize” the country’s volatile stock markets, which plunged by nearly 30% in the three weeks to July 3.
China Securities Regulatory Commission (CSRC) spokesman Deng Ge announced late on Sunday night that there would be no initial public offerings in the near future.
Although the securities regulator will not stop reviewing IPO applications, the number of IPOs and the size of fundraising will be significantly reduced, he added.
The CSRC announcement came after 28 Chinese companies on Saturday agreed to “voluntarily” postpone their IPO plans, with most attributing the decision to the “recent big market volatility,” according to their filings with the Shanghai and Shenzhen stock exchanges.
All 28 firms had received regulatory approval to go public and some that had already finished book building promised to return capital to investors soon.
The suspension came as a surprise given that the CSRC on Friday agreed to grant 10 companies IPO approval early this month.
The CSRC has typically approved more than 20 IPO applications every month this year.
“One basic function of capital markets is to let companies raise money through IPOs,” said Zhang Xiaojun, another CSRC spokesman, at a briefing after the market close on Friday.
It is the ninth time the central government has halted IPOs on the country's stock exchanges in Shanghai and Shenzhen.
The last time the government intervened to suspend IPOs was in November 2012. The moratorium on new listings lasted 14 months and was never properly explained by the regulator. The shortest suspension lasted three months in 2001.
A research note co-authored by two HSBC analysts on Monday said the freeze was “a major positive catalyst” for the markets as a flurry of IPOs in recent months, notably in June, increased volatility due to the huge amount of cash tied up during the bookbuild.
The HSBC analysts cited several transactions to illustrate the point, namely the Shanghai listings last month of Guotai Junan and China National Nuclear Power Cooperation. Two of the largest A-share IPOs in years, the offerings locked up Rmb2.35 trillion and Rmb1.7 trillion of capital during their subscription periods, while they only aimed to raise up to Rmb30 billion and Rmb13 billion, respectively.
Galaxy Securities, a major Chinese brokerage house, estimated the cancellation of the 28 IPOs will free up Rmb1.4 trillion to the market. In a broader context, however, Galaxy's figure only accounts for 2.8% of the value of Chinese stock markets, which is about Rmb50 trillion - roughly 80% of the country's GDP last year.
According to a recent survey conducted by domestic online portal Sina, 80% of more than 20,000 respondents think the suspension of IPOs will be the most effective way to stabilize the market.
Chinese retail investors, who account for the majority of trading, are keen to sell holdings in order to participate in initial offerings, a customary practice which can nevertheless trigger market volatility.
On Monday, Chinese stock markets seemed to appreciate Beijing’s move, with the benchmark Shanghai Composite Index advancing 7.9% at the start of trading before closing out the day with a modest gain of 2.4%.
China Life Insurance, PetroChina and other large state-owned enterprises and banks jumped by almost 10% - the maximum daily limit.
Equity analysts and traders attributed the surge of the so-called blue chips stocks to Beijing’s liquidity injection. For example, 21 of China’s biggest securities firms on Saturday said they would deploy Rmb120 billion to set up an exchange traded fund that will mainly invest in shares of large SOEs.
Unlike the blue-chips, shares of small- and mid-cap companies performed poorly in Monday's trade. The tech-heavy Shenzhen Index, which attracts smaller and privately owned firms, closed the day down 2.7%.
“The suspension of IPOs could help stabilize the markets but it’s not the key,” said Peter Li, an investment banker based in Beijing. “Investors’ confidence is the key. Without it, investors will continue the sell-off.”
Li said that although the IPO suspension shows Beijing’s determination to prevent a market rout, it could also undermine its credibility.
“A government’s policies cannot behave like this – zhaolingxigai,” he said, using the Chinese word associated with a proverb about issuing a policy in the morning and rescinding in the evening. “All these inconsistent policies will only confuse investors and scare them away.”