China cracked open the door to initial public offerings (IPOs) at the end of June, sending companies into a frenzied push for places on the Shanghai and Shenzhen exchanges.
"The demand is clearly there for domestic companies to list and at some point the gates have to be opened,"said Michael Fosh, a partner in the law firm Herbert Smith who has worked on Chinese listings. "Conversely, one might ask, ‘How long can you hold back the demand from local firms for financing?’."
Apparently not for very long. The first two new IPOs, Guilin Sanjin Pharmaceutical and Zhejiang Wanma Cable, saw their share prices shoot up 82% and 125% respectively on their debut day in Shenzhen. The trend looks set to continue.
"Demand right now is still greater than supply,"said Alex Guo, sales and transaction manager at Sinolink Securities in Shanghai. "So as long as there is a new IPO, people will rush to buy it."
According to Fraser Howie, author of a book on China’s stock market, state-owned companies in the construction, power and infrastructure sectors are likely to produce the strongest listings.
The China Securities Regulatory Commission (CSRC) issued new regulations in June to control first-day price rises, but Fosh said the response to the Guilin Sanjin and Zhejiang Wanma IPOs suggests those regulations have not taken effect to the extent the CSRC would like. The CSRC will be watching the number of issues as well for the near future.
"I think the regulators would like to see continued buoyancy in the market. They are happy for investors to make healthy profits so long as they are not too healthy,"said Fosh. "The regulators want sufficient new offerings to absorb some of the liquidity whilst avoiding another bubble or an oversupply leading to a major market correction."