Chinese retail investors see quick returns from next round of IPOs

PUBLISHED : Wednesday, 11 June, 2014, 1:15am
UPDATED : Wednesday, 11 June, 2014, 1:15am

A clutch of new shares about to flood the mainland's equity market is expected to exacerbate weak sentiment but, emboldened by past experience, retail investors are still queuing up to chase quick returns from the newly listed stocks.

Market watchers predict the securities regulator will resort to administrative measures to rein in irrational buying in initial public offering (IPO) shares as part of its efforts to protect investors.

One mainland investor, Edward Zhang said he was well prepared for the IPOs, with "ample cash" on hand.

"Trading in IPO shares is more interesting because there will be strong liquidity and chances to make a handy profit," he said. "Indeed, lots of investors still believe new shares are safe bets."

I will dump all of them on the first trading day no matter how big the returns

The China Securities Regulatory Commission (CSRC) started vetting IPO applications again in late April following a 19-month hiatus, and plans to allow 100 companies to float new shares on the Shanghai and Shenzhen stock exchanges this year.

On the mainland, most IPO shares have historically surged more than 30 per cent on the first day of trading due to frenzied buying by retail investors.

Before 2009, the CSRC required all listing applicants to set offering prices artificially low and all IPO shares were heavily oversubscribed as investors chased first-day gains.

The regulator reformed the IPO mechanism in 2009 to let companies and investment banks set the prices freely.

But despite lofty offering prices, IPOs remained darlings of retail investors, with most new shares jumping at least 10 per cent on their trading debuts.

Many investors who failed to obtain IPO shares during the subscription process chased first-day rallies before getting burned amid subsequent roller-coaster rides.

"It's a story of love and hate," said West China Securities analyst Wei Wei. "But many investors still want to try their luck in the new IPO spree."

Investor Zhang said he would play it safe this time around, locking up any gains on the first day of trading.

"I have enough cash to make sure I can get some of the new shares, and I will dump all of them on the first trading day no matter how big the returns they can generate," he said.

IPO share winners are picked through a lottery system. The more upfront money an investor can pay to subscribe to an IPO, the better their chances of obtaining the sought-after shares.

According to mainland media estimates, about 40,000 brokerage accounts were reactivated recently as investors made fresh deposits in anticipation of the IPO rush.

The mainland's stock markets have been in a bearish mood since 2010, with most retail investors sitting on paper losses.

The benchmark Shanghai Composite Index is now hovering around the psychologically-important 2,000-point level and the shares unleashed by the new IPOs are poised to knock it down further if sentiment sours.

"We'll wait and see," said retail investor Li Minghui. "If it falls below the 2,000-point level, I think I will focus only on the IPO subscriptions because it is the only chance for us to make money from the market."