… Must come down. A combination of Air China having to cut its IPO by 39% and the Shanghai Composite index dropping about 10% over the last month appear to have the regulator running scared. It was reported today – originally in the South China Morning Post – that a one-month IPO suspension is being considered to give the market a chance to cool down.
Rather than apportion blame to any one particular party, we might as well put it down to the inevitable hangover after the sudden and exciting return of IPO activity in Shanghai. Think of a plane crash survivor who stumbles upon an oasis after days in the desert without water – he overindulges and his body, which needs time to adapt, pays the price.
Yes, Air China probably did price its IPO too high – working out at 20 times forecast annual earnings, compared to P/E ratios of 10-14 for other listed airlines in Asia – but this merely provided the headline for something that had long been brewing.
Air China overreached itself, just as Chinese investors have been doing for a couple of months. Starved of fresh meat for a year, they overdosed once IPOs resumed, sending activity to a super-high that couldn’t be sustained. Now, with a host of companies looking to list – together with the unravelling of previously non-tradable state-held shares – investors are holding back for the particularly good stuff.
Should we be surprised that the regulators are considering intervention? Not particularly. The relaunch of domestic share offerings has been micro-managed to such a degree – first we were drip-fed announcements of listing rules, then companies were escorted to the market in a fashion that would make a Broadway producer proud (start with some reliable dancing girls then bring on Bank of China for her big number…) – that further alterations seemed almost inevitable.
And, not wanting to undermine investor confidence, it is unlikely the regulator will ever officially release news of a temporary suspension of listings into the public domain. Careful management, yes, but are frequent rule changes – often clothed in secrecy – good for the market in the long term? Probably not.