It’s a miracle. After a year without an IPO on the mainland, China’s newest listed firms have performed incredibly well in their first few months on the market.
The 48 companies that listed in January before Chinese New Year were trading at an average of 58% above their listing price as of Tuesday, according to data compiled by CapitalVue. None have fallen below the original price and several had experienced amazing growth. The price of Geron, a textile carding equipment maker that listed in Shenzhen in January, increased 168%.
More likely than not, the rapid gains can be attributed to the rock-bottom prices at which the companies listed. When the China Securities Regulatory Commission (CSRC) lifted its implicit ban on IPOs in January, it also ramped up the regulatory hurdles facing companies about to go public. Those with high valuations were asked to tone them down. One IPO was even canceled.
The low offering prices have led to rampant speculation on the new listings. After 14 months without an IPO, in a market that has performed poorly this year, the new shares looked like a steal. “Especially compared with current market, those valuations had a certain advantage,” said Hou Yingmin, an equities analyst at Shanghai-based Aijian Securities. “So the market has led to continuous speculation.”
One mainland equities analyst at Zhongcheng Securities called this year’s listings a “bubble.”
The reopening of the stock exchange to IPOs wasn’t supposed to happen like this. The problems afflicting the market now are the same ones that have troubled China for years. If this is a bubble, investors will stand to lose as they have in the past. The phenomenon doesn’t bode well for the companies either if they were indeed pushed to list at below what the market thinks they are worth.
Late last year, the Chinese government pledged to upgrade the listing process to a registration-based system more in line with exchanges in developed markets. The current application process is arduous and time consuming as firms’ IPO plans are reviewed individually. The CSRC tends to tighten regulatory hurdles when liquidity dries up and goes lax when conditions are better. Many companies wait years to list; some go bankrupt during that time without access to capital.
A registration system, on the other hand, sets standard entry requirements that don’t change with the weather. This is usually followed up with stringent controls on company behavior after listing, something China is in desperate need of. Regulators have not been tough on fraudulent companies that make off with investor funds. Retail investors have ridden speculative waves only to lose it all in Shanghai and Shenzhen when a company is discovered to have filed misleading reports.
Before the market reopened to IPOs in January, experts told China Economic Review that a registration system would likely be adopted in March. Last week, the State Council, China’s cabinet, issued a document that said it would aim to adopt the registration-based system while also reinforcing the regulation of companies after they go public.
But the market can’t have one without the other. If the CSRC lowers the regulatory barriers to entering the market but doesn’t throw the book at cheaters, investors will be more exposed to fraud
“Without the post-listing regulatory system, then relaxing the approval system will bring a lot of disasters,” Michael Luk, a Hong Kong-based analyst at investment bank Mizuho, said. At the same time, the new registration system will need to make sure that companies that aren’t fit for listing don’t get on the market.
On March 7, Shanghai Chaori defaulted on a corporate bond. However, the company likely should never have been allowed to issue the bond. The problem demonstrates how regulators struggle to weed out the duds. When Chaori got into trouble, we found that it probably should have never been allowed to list anyway,” Luk said. “So this is going to be one of the first kind of problems [CSRC] runs into.
The transition to the registration system is set to be awkward given the heavy regulation this year. Mainland analysts are hopeful for the new system. However. as the researcher at Zhongcheng said: “The change is still a long way off … Regulation will probably remain tight for now.”