A hollow victory

I was not among those cheering on the surge in the PetroChina A-shares when they listed in Shanghai on November 4. They immediately soared to almost treble their RMB16.70 (US$2.25) issue price, supposedly making PetroChina a trillion-dollar company and surpassing ExxonMobil as the world’s number one company by market capitalization.

The reason for my lack of enthusiasm was not that I had followed US investment guru Warren Buffett’s advice and a couple of weeks earlier sold my Hong Kong-listed PetroChina H-shares, by then trading at more than 10 times their 2000 issue price. What was so disheartening to this somewhat skeptical 40-year observer of stock markets was that the regulators were doing a disservice to the nation in the way the issue was handled.

It merely added to the fever which had been affecting mainland markets for the past 18 months.

In principle a major new share issue should absorb enough of the cash available for stock investment to keep a dampener on prices. But by selling a mere 2.18% of its stock to mainlanders, PetroChina, and the regulators, were simply inviting an opening day stampede from those who missed out on the initial public offering.

Even that 2.18% was a misnomer as it included 1 billion of the 4 billion shares on offer were made available to well-placed insiders in advance of the IPO but which could not be on-sold for three months. Of the remaining 3 billion IPO shares, a significant, if unknown, percentage went to institutions which will hold rather than trade the stock, further squeezing the share supply open to small investors.

Insider interests

Quite why it was decided to have such a tiny offering when the market was awash with cash is not entirely clear. It may be because it is in the interests of those able to get shares – many of them insiders – to see a boom in the price.

This is not the first time that this has happened with offerings of state-controlled companies, whether in the A- or H-share markets. Indeed, it is all too common either for a small number of shares to be listed, or for the IPO price to be kept so low that a huge initial price premium is established as soon as trading begins.

Again, these practices seem more in the interests of sponsors and insiders than of the company itself or the government, which is effectively selling the shares. Small investors suffer both directly (artificial shortages force them to pay high prices in the secondary market) and indirectly (because the state itself is losing out).

This process can be seen as even more disquieting for those of a nationalistic mindset because it means foreigners can often obtain stock much cheaper than mainlanders.

The fact that many A-shares trade at a vast premium to their H-share equivalents can be blamed on the immaturity of the mainland market and the lack of alternative investment outlets. But it is also comes down to availability. The brutal bottom line is that while only 2.18% of PetroChina’s shares are listed on the mainland, 11.53% are listed in Hong Kong and available to all foreigners.

Shortchanged

One of the features of well-run markets is that share ownership be sufficiently wide to prevent manipulation. In China’s case the situation is different in respect of state-owned companies where the state undertakes not to sell any more shares for a specific period.

However, neither this nor the fact that a lot of mainlanders have since bought in absolves PetroChina of not providing a meaningful number – in percentage terms – of its shares to China’s people. Given the levels of liquidity in the booming market, it would easily have been able to dispose of three times the number of shares at the IPO price.

A much bigger issue would have been good for the state vendor, the company and the investing public. It would also have reduced price fever in the Shanghai market and contributed to the development of a share-owning economy with investors buying for long-term earnings rather than hope of quick capital gains.     

In the PetroChina case, as in others, narrow and insider interests triumphed. So those who cheer the trillion-dollar capitalization (based on just 2% of the shares!) may have cause to worry about the effect on public sentiment when the bubble bursts. Small investors will lose out while the pre-IPO insiders and their easy profits will be long gone.