When it comes to China IPOs, investors are irrational
Beijing's planned new market-based IPO mechanism may be ignored by retail investors keen on quick first-day gains
There seems to be no let-up in the enduring love affair between mainland investors and newly floated stocks despite repeated warnings from authorities, a trend that threatens to undermine a proposed new system of pricing initial public offerings.
All of the eight stocks making their debuts on Thursday and Friday triggered trading suspensions by the Shanghai and Shenzhen stock exchanges after they surged to their 44 per cent first-day ceiling. The rally was yet more proof that new shares continue to be the brightest sparks in the volatile mainland market where speculation continues to reign over prudent stock picking.
Offerings are perennially favoured by mainland investors because buying euphoria on the first day of trading usually drives up the shares up by at least 30 per cent. The first-day craze, however, almost always end in a whimper when heavy profit-taking sets in.
"The chances of making money in new shares are much bigger than playing other existing stocks," said retail investor Yang Xiaowen, on why he does not heed the advice of the China Securities Regulatory Commission.
Beijing removed a 15-month suspension on listings from the beginning of this year and thousands of retail investors like Yang are again gravitating towards new shares, willing to risk their life's savings on new stocks.
Investors like Yang first try to put as much as they can into offer subscriptions, hoping to cash out when the customary first-day euphoria pushes up the price. In this lottery, the more an investor puts into subscriptions, the greater the chance of getting more shares.
"But the punting doesn't stop there because investors in general believe the debut rally will run for a few days. So those who fail to secure shares on subscription allotment buy it on the first day of trading and push up prices even further," said Haitong Securities analyst Zhang Qi.
Take Shanghai Lianming Machinery. As of Friday, its shares had risen a whopping 263.7 per cent since their debut on June 30.
"This blind optimism results in a sharp spike and then, inevitably, a sharp fall," Zhang said.
The root of the problem lies in the history of the mainland's stock market. When it was created in 1990, the regulator forced IPO issuers, mostly state-owned firms back then, to set low offer prices to facilitate fundraising. So those lucky enough to buy on allotment or on the trading debut stood a good chance of making a killing later on.
In mid-2009, the listings system was overhauled, letting underwriters and companies price shares freely. That did little to kill the appetite for new shares but high offer prices and massive fundraising amounts knocked down the market as issues soaked up funds from existing holdings. The CSRC stepped in again this year, forcing firms to control their fundraising size.
Beijing has now pledged to embark on a new market-based mechanism next year. Under the new system, companies would be required to publish all information about earnings and operations once they submit listing applications, and investors can decide their worth.
The latest exhibition of the familiar irrational exuberance on new shares poses a threat to the new system. If this is how investors view new shares, there would be no end to overpriced offer prices.
"The regulator has yet to understand what market forces mean while retail investors don't actually want to learn," said Chen Jinquan, a fund manager at Aegon-Industrial Fund Management. "It will continue to be a speculators' market for many years."