Chinese IPO

Threat of China's IPO overhang exaggerated

Most of the listing hopefuls are smaller companies with modest fundraising plans.

China’s bulging pipeline of initial public offerings is the single biggest bottleneck in the domestic equity market. It is certainly a critical issue for the nation’s securities regulator, which has made it a priority to deal with the overhang.

However, some specialists say the potential threats have been exaggerated. “Most of these companies are small and the amount they plan to raise is not a lot,” according to Hu Zhanghong, chief executive of CCB International. “In normal days, the market can absorb around 600 IPOs in two years.”

Indeed, based on the 563 companies that have published fundraising plans, the total amount of money to be raised is about Rmb300 billion ($48 billion). That is equal to about 1.4% of the combined Shanghai and Shenzhen market capitalisation, based on analysis by Credit Suisse.

The latest figures from China Securities Regulatory Commission (CSRC) show that there are 869 companies on the list, many of which have been waiting for years.

Compared to around 2,500 listed A-share companies, the waiting list of new issuers is rather long but many of them plan (or will be forced by the regulator) to list on the secondary board, which caters for start-up enterprises.

Even when markets were weak in 2012, with the window for new offerings closed almost half the time, China still managed to chalk up 155 IPOs, raising a total of Rmb108 billion.

If the IPO backlog is not the cause of the weak market sentiment, what is? Vincent Chan, head of China research at Credit Suisse, notes that the bigger problem lies in the fact that China’s IPO market is distorted and has steadily eroded investor confidence.

Chan and his team compared the A-share market’s IPO performance to that of Hong Kong IPOs during the past two years. Investors who bought an IPO on day one and sold it a year later would have lost an average 42% of their money on the A-share market, compared to 15% in Hong Kong.

Worse still, a one-year investment in A-share IPOs was a losing bet in 95% of cases. In Hong Kong, on the other hand, the outcome was more balanced, with a 59% chance of making a positive return and only a 37% chance of losing money.

Even so, global banks are generally optimistic about China’s stock market. Citi has estimated the Shanghai A-share index is poised to outperform all the G20 equity markets in 2013, while Chen Li, China equity strategist of UBS, forecasts an annual gain of 20% for the Shanghai Composite Index.

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