The careful resumption of mainland initial public offerings (IPOs) seems set to turn into something of a frenzy. It started quietly enough, with the China Securities Regulatory Commission (CSRC) emphasizing that it would stick to IPOs of small and mid-cap companies, and the Shenzhen Stock Exchange adding that the first-day share-price fluctuations of those small and mid-cap companies would be limited.
That early caution seems to have gone out the window thanks to the bumper first-day gains made by the initial group of listings on July 10. Investors and companies are hungry for more. The excitement has already prompted construction giant China State Construction Engineering to talk about moving up its US$5.9 billion Shanghai IPO – not exactly small-cap material.
All this is taking against a backdrop of an economy that continues to expand at a rapid pace. China’s GDP grew 7.9% in the second quarter, and few now doubt that it will be able to achieve something very close to its growth target of 8% this year.
The key to this growth is bank lending. Nearly US$1.1 trillion in new loans were given out in the first half of the year, higher than Beijing’s minimum target of US$731 billion for 2009 as a whole. Much of that money is going to areas that will create a long-term benefit for the economy, but much, it would appear, is not. The State Council’s Development and Research Center said that about 20% of new lending has found its way into the stock market.
Seen in light of heavy lending, the sharp rise of the Shanghai Composite Index – up about 75% this year – and the growth of the economy are easier to understand, and much more worrying.
That is not to say the growth has no basis. Corporate earnings are up, manufacturing is expanding and relatively moribund sectors of the economy are looking up. Such data help to ease concerns about the sustainability of a rebound, but it doesn’t remove them. This is a recovery led by government investment (urban fixed-asset investment was up 33.5% in the first half), based on the premise that when Beijing spends the private sector will ultimately follow. There are signs this is happening – slowly.
So yes, things now appear to be less bad, but this doesn’t justify the exaggerated response of China’s stock market, which – lest we forget – is still immature and volatile. After a nine-month moratorium, investors are clearly keen on new IPOs, but the market’s ability to absorb a glut of new supply remains unclear. Regulators need to play this game carefully; the CSRC was right to be cautious, and it should not abandon that approach.
Beijing should rightly be proud of its ability to steer the country through a period of economic uncertainty. Success to date, however, is no guarantee of success in the future. The government must find a way to balance the need to promote growth with the need to rein in the economy’s more free-wheeling elements. This will not be an easy task.