Report says underpricing costs mainland billions of dollars and feeds market fever The World Bank has criticised Beijing for deliberately underpricing domestic stock offerings, saying it has resulted in billions of dollars of lost revenue to state coffers while lining the pockets of insiders and feeding the stock market frenzy. The stinging rebuke, made in the World Bank's newly issued quarterly report, is likely to add to calls for the China Securities Regulatory Commission, which micro-manages the price setting of initial public offerings, to allow the market a greater role in the decision. 'The systematic underpricing of IPOs has not only led to significant losses to the state [and windfall gains to insiders such as managers and investment banks trading on their own accounts] but has led to rapid price increases shortly after the issuance,' the report states. The price of shares after their first day of trading was on average 70 per cent higher than the initial listing price in the first two months of the year, according to investor information provider Dealogic. A shares sold in the US$3.3 billion listing of Bank of Communications rose 71 per cent on their debut in Shanghai earlier this month. China Life Insurance's A-share price more than doubled on the first day. The report calculates that the state could have raised US$9.5 billion more this year had the offerings been priced at their first-day closes - or US$1.5 billion more than the central government plans to spend on its free education programmes this year. 'The government leaves a lot of money on the table and that is a pity, because if they made more, they could afford to fund good things such as better health care and rural education,' said Bert Hofman, the World Bank's lead economist for China. To be sure, some room for first-day rises is necessary to attract investors to new listings. In addition, debut price surges are especially common both during bull markets and in developing economies. However, the average first-day return in the mainland in the first two months of the year has surpassed by five percentage points the rate during the dotcom bubble, indicating that mainland share offerings could probably be priced much tighter. In each of the past five years, the first-day returns of Shanghai listings larger than US$50 million have averaged more than 36 per cent, according to Dealogic. Some analysts criticise investment banks and companies for failing to reflect the market value of new listings during the underwriting process. But market insiders note that it is the regulator that has the final say over pricing. In China Citic Bank Corp's US$5.4 billion dual A and H-share listing last month, the commission forced the underwriters to lower the top of the indicative range by 5 per cent, cutting the fund raising by as much as US$287 million. The shares jumped 96 per cent on the first day of trading in Shanghai. Critics contend that it deliberately sets the prices low to ensure phenomenal growth on the first day of trading on the mainland markets and for state companies listed in Hong Kong in order to make a major splash. 'A little bit of underpricing is in the government's interest because it makes share ownership more popular,' Mr Hofman said. Soaring debut prices have helped stoked the frenzy on the stock market, which has risen 62 per cent this year after a 130 per cent jump last year. Industry officials said the CSRC should step back, and leave the pricing of new listings to market forces. The key beneficiaries of underpricing are the owners of the shares - mainly institutions and other large investors, well-connected individuals and government officials - as well as company managers whose reward packages are linked to share-price performances.