Chinese regulator changes rules of the game by intervening in IPOs

As the resumption of mainland listings gets under way, invasive action unsettles market

PUBLISHED : Monday, 20 January, 2014, 12:03am
UPDATED : Monday, 20 January, 2014, 2:37am

Imagine if you were bidding on a vintage Ferrari at Sotheby's. Under logical and economical circumstances, the highest bidder for the classic vehicle should win the auction and drive home with the car.

However, the rules of the game in China's listing market seem to vary from conventional wisdom - the highest bidder won after the country's securities regulator intervened in the pricing mechanism in the recent resumption of the initial public offering market.

At least three mainland listing hopefuls, including Beijing Utour International Travel Service, said in statements to the Shenzhen exchange that the highest bidders for their offerings were rejected because the shares were marketed as too expensive.

Beijing Utour said about 96 per cent of would-be investors placed the highest bid at 31.80 yuan (HK$40.70) a share, but the majority buyers were eliminated in the bidding process.

After removing the highest bidders, the median price offered by mainland institutional investors and government-controlled fund management firms were 28.46 yuan and 29.43 yuan respectively, still higher than the final offer price of 23.15 yuan.

It said the price-earnings ratio was about 22 times, which is way below the industry average of 43 times.

A senior Chinese banker with a US investment bank told IPO Watch that the mainland listing market was still undergoing a stage where the China Securities Regulatory Commission intended to boost investor confidence by depressing valuations artificially.

"Too many small retail investors … experienced substantial losses in an IPO market that was known for high valuations and volatile conditions in the newly listed shares," the banker said.

A top-ranked strategist from another Wall Street bank said the climate in the stock market was still unpredictable and murky given that the listing market was fraught with cancellations and delays imposed by the securities regulator.

The listing reform is meant to allow market-based decisions where issuers, underwriting banks and investors can take a more active role in the pricing and deal process - essentially the backbone of liberalisation in China's "approval-based" financial market.

Last week, IPO Watch argued that the cancellation of Jiangsu Aosaikang Pharmaceutical's offer was an obvious sign of breaching the market-driven model, leading to a dent in confidence about the authorities' self-proclaimed market reforms.

In response, the CSRC said the old shares should not be more than 25 per cent of any equity fundraising process as anything higher could spark worries of an exit by major shareholders. However, no one can fully see what a "reasonable price" and "appropriate size of old shares" might be.

Investors sitting in Hong Kong are doubtful about the market-based reforms, and so are people in the domestic market. Government bureaucrats can set the rules but not step on them.