China’s efforts to alleviate shortcomings in its capital distribution will be brought to bear with the launch of the long-awaited Growth Enterprise Market (GEM) in Shenzhen.
The NASDAQ-style board is geared to allow small- and medium-sized enterprises (SMEs) to tap the country’s capital markets. Many of these firms have traditionally struggled to fulfill their potential as banks prefer to lend to state-owned enterprises.
However, concerns have been raised that the new market will draw funds away from the main boards. Market watchers believe these fears are premature.
"Some people are worried over the GEM’s influence on the cash distribution in China’s initial public offering (IPO) market," said Yu Xuhui , an analyst at brokerage Shenyin & Wanguo. "But we don’t believe the new board will have any wider effect, as the transaction volumes will still be very small compared to the main bourses."
As Jing Ulrich, chairman of China equities at J.P. Morgan, noted, the first 10 companies approved to list on the GEM board aim to raise a combined US$1.01 billion – a fraction of China’s average monthly IPO fundraising in the third quarter of 2009.
However, despite a summer of sizzling IPOs, recent listings have been given a cooler reception, both domestically and in Hong Kong. Metallurgical Corp of China (MCC), the first company approved for a dual listing in 10 months, saw its A-share price rise by 28% as it debuted on September 25 compared with an average first-day gain of 68% for the some 22 other companies that listed in China since June. A day earlier, MCC’s H-share debut also fell flat, with the stock price falling 13% from its opening level.
Investor confidence may be evaporating as expectation mounts that the central bank will rein in lending. Yet according to the People’s Bank of China, new loans issued in September stood at US$75.6 billion, up from US$60 billion in August.
Although Ulrich believes Beijing has shifted from an "ultra-easy" credit policy to "accommodative policies aimed at achieving more sustainable growth," she still says concerns about policy tightening are "overdone."
Time will tell whether investors will maintain strong interest in new offerings on Shenzhen’s GEM. Any cooling in sentiment should be seen in relative terms: IPOs in China and Hong Kong have amounted to US$25 billion so far this year, representing half the total funds raised globally.