China liquidity crunch hits plan to restart IPOs after eight month freeze
Surge in interbank lending rates, stock market volatility raise doubts about Beijing plan to allow listings for first time since October
Ray Chan and George Chen
Beijing's plan to restart initial public offerings has taken a hit as a result of the stock market meltdown following the interbank liquidity crisis that is now threatening to affect Hong Kong offerings as well.
On Monday, the Shanghai Composite Index plunged 5.3 per cent, closing at its lowest for nearly six months. Mainland shares suffered another volatile session yesterday as investors fretted about slowing economic growth. They dumped bank stocks again amid concern about the capital strength of mainland lenders, in particular mid-sized banks.
The Hang Seng China Enterprises Index, which tracks mainland firms in Hong Kong, fell 0.8 per cent to 8,871 points after falling to its lowest since October 2011 on Monday. The Shanghai Composite closed 0.18 per cent lower at 1,959.51 points yesterday, recovering earlier losses after the People's Bank of China eased liquidity fears.
Just a few days ago, the possibility of the reopening of the IPO market as early as July had the mainland market buzzing with excitement. Beijing suspended listings in October last year.
Yao Gang, a vice-chairman of the China Securities Regulatory Commission (CSRC), reportedly told representatives of major mainland brokerages in a closed-door meeting in Beijing last week that he wished to see a new wave of IPOs.
Yao's boss, Xiao Gang, the CSRC chairman who took office three months ago, has been under growing pressure to allow IPOs from capital-hungry state-owned enterprises and private companies alike.
"Recent speeches and actions from senior government officials and regulators have already given the market a strong signal for reform," analysts at Nomura said in a research note.
The market is closely watching Shanghai-listed China Everbright Bank as the Beijing-headquartered lender reportedly failed to repay on June 6 a 6 billion yuan (HK$7.6 billion) interbank loan from Industrial Bank, partly owned by Hong Kong's Hang Seng Bank.
Everbright Bank had planned to list in Hong Kong this year.
The bank has tried to list in Hong Kong at least three times over the past few years but failed every time, largely because of poor market conditions. Bankers working on the deal said Everbright executives were looking to start a roadshow in the next week or two but might have to scrap the plan because of the interbank liquidity crisis.
"If the bank still wants to be listed, it will have to do one of two things: lower its expectations on the IPO price, or cut the IPO size in half," said one veteran banker familiar with the situation. "If they choose the original price target and size, I think we can forget it for this year."
Even apart from the liquidity crunch in the financial industry, the outlook for Everbright's listing looks challenging. But bankers said the deal "must go ahead" because Beijing had given its official approval.
Listed banks are trading in Hong Kong at a price-to-book-value ratio of 0.9, less than the listing requirement of at least 1.
Macau Legend Development recently reduced the size of its planned IPO to about HK$2.79 billion from HK$6.1 billion.
It cut the number of shares offered to institutional investors while keeping the price range and size of the retail tranche unchanged. Bankers said the discount on new shares was "significant". The final pricing of Macau Legend is due on Friday.