Retail investors wary of fresh flood of IPOs
Outlook for listing market remains bleak amid fears of a flood of new share sales, despite regulator's assurances of tighter procedures
When the China Securities Regulatory Commission resumed vetting applications for initial public offerings, the A-share market wobbled as investors feared an onslaught of new stocks would drain liquidity from the market.
Although the regulator said a more rigorous procedure for stock offerings would safeguard investors' interests, the outlook remains bleak, as mainland firms' demand for fundraising appears insatiable.
The CSRC approved three of the four applicants on April 30, the first time it had reviewed listing applications in 19 months, sending a clear message to the market that the floodgate for share sales had been reopened.
It plans to vet six more applications this week.
Beijing is determined to relaunch the listing market as a way to diversify the funding channels open to companies suffering from a tightening of credit.
The mainland's financial system has been at increasing risk of defaults and non-performing loans in the face of the rampant growth of shadow banks and slowing economic growth.
It is thought that an active fundraising platform provided by the capital markets could allocate investment more efficiently than the banking system and allow private firms greater scope to revitalise an economy weighed down by sclerotic state-owned entities. But not all market participants are enamoured of public share sales.
"IPOs are evil," said Gan Hua, a disgruntled retail investor. "They give the companies the right to collect investors' money, but we never get any returns."
Xinhua warned in a commentary on Tuesday that more retail investors would exit the stock market if the regulator chose to cater to fundraising firms without regard to the interests of small players.
Beijing suspended new share sales in October 2012 to bolster investor sentiment while pledging to map out a new listing system to ensure the long-term healthy growth of the capital market.
It reopened the market at the beginning of this year. In January and February, the CSRC allowed 12 companies with listing applications processed before October 2012 to conduct share sales.
The fundraising spree exacerbated the weak market sentiment, with some of the companies pricing their offerings at a lofty level, triggering an uproar among investors as the new stocks soaked up liquidity.
Between 2010 and 2012, an IPO bonanza siphoned off more than 1 trillion yuan (HK$1.24 trillion) of capital from the mainland stock market, which became one of the worst performers worldwide.
This year, all eyes have been on the new listing review system, which allows the market to decide on the firms' valuation.
Listing candidates are now required to fully publish details of their earnings and operations when submitting fundraising applications to the regulator.
The CSRC no longer plays a role in the stock float's pricing, which has been criticised in the past for being too rich, but is responsible only for judging the truthfulness of the information submitted to it, leaving market forces to set the firms' value.
More than 240 companies have published details of their earnings and operations as they await CSRC hearings.
However, analysts said the reform was half-hearted as it did not go far enough to protect retail investors. Institutional investors, they said, could still control the price of the new shares when they subscribed to them before they came to market.
Millions of retail investors were left to carry the bag in the past after they bought new shares that crashed below their offering prices shortly after their debuts.
Hu Ruyin, the head of the Shanghai Stock Exchange's research department, told a forum recently that the changes to the listing system were only "transitional" and the regulator had to fine-tune the new rules to make the reform a success.
"Obviously, investors are fed up with IPOs," said Dong Jun, a Shanghai-based hedge fund manager. "The root cause lies in the companies, which only focus on raising funds without caring about how they could improve their performance to reward shareholders."
Some 600 firms are lined up to float their shares on the Shanghai and Shenzhen stock exchanges.