Shanghai stocks fall on the prospect new listings will resume

Shanghai Composite Index closes 0.59pc down after the regulator announces a new initial public offering mechanism to benefit investors

PUBLISHED : Tuesday, 03 December, 2013, 5:45am
UPDATED : Tuesday, 03 December, 2013, 5:45am

Beijing’s signal that it will resume initial public offerings sent stocks tumbling yesterday on fears of an influx of new shares, but doubts on the proposed reforms persist.

The China Securities Regulatory Commission (CSRC) reiterated a new IPO mechanism would give investors’ interests high priority as it seeks to align the system with best international practices by embarking on a disclosure-based listing method to replace the previous approval-based review procedure.

The announcement on Saturday spelled the end of a one-year IPO drought on the A-share market as the CSRC said it would take a month to complete the preparatory work before granting approvals to the first batch of companies applying to raise money.

In response, the benchmark Shanghai Composite Index closed down 0.59 per cent to 2,207.37 points yesterday, ending a three-day winning streak. 

A total of 760 firms are in the queue to launch IPOs on the A-share market following the one-year hiatus. A resumption of initial public offerings is naturally expected to drain liquidity from existing holdings.

But Dong Jun, a Shanghai-based hedge fund manager, said: “It’s not about the reform method. Retail investors have lost money for the past years because the stocks they bought were not worth the prices they paid.”

Beijing temporarily halted IPOs in October last year to bolster investor confidence, with the CSRC citing the need for time to design a new mechanism as reason for the suspension.

The regulator said it would issue new detailed rules governing the disclosure-based IPO system, adding that it would be implemented gradually.

Under the old system, the CSRC had the power to assess listing applicants’ fundamentals and earnings prospects while setting the flotation time frame.

The regulator said it would relinquish its review responsibilities while letting the market decide the mettle of IPO candidates.

The listing review committee is responsible for ensuring the accuracy of the information in the listing documents, which are made public once the listing applications are filed.

Not all investors are convinced about the IPO reform, though. “There’s nothing concrete to protect investors,” said Dazhong Insurance fund manager Wu Kan. “Investors buy shares to chase returns from the companies’ improved performance. Unfortunately, not many of them have really rewarded investors with dividends.”

Mainland investors have often fallen victim to falsified figures and left out of pocket as companies’ earnings plunge after listing.

In 2009, a new IPO mechanism that gave institutional investors a bigger say in pricing new shares after a nine-month suspension left thousands of retail investors in the red as the shares fell soon after their debuts.