Chinese retail investors’ bet on IPOs pays outsize dividends, but analysts say bubble could burst without warning

The 243 IPOs in China this year delivered an average first-day appreciation of 126 per cent, according to Wind Information

Cathay Biotech, which listed on the Star Market in Shanghai on August 13, became the first stock to slip below its IPO price this year

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China’s retail investors account for some 70 per cent of the country’s stock market transactions. Photo: EPA-EFE

Published: 1:30pm, 5 Sep 2020Updated: 1:30pm, 5 Sep 2020

The initial public offerings (IPOs) of Chinese companies listing on the mainland’s stock markets have provided sure-fire first-day returns for the nation’s vast army of individual investors, but analysts cautioned that such exuberance could lead to a repeat of the meltdown seen five years ago.

While all 243 IPOs completed during the first eight months of this year rose on debut, the first-day gain averaged 126 per cent, according to data provider Wind Information.

“The buying craze in IPO shares is a phenomenon with Chinese characteristics,” said Ding Haifeng, a consultant with Shanghai-based financial advisory firm Integrity. “Retail investors have a firm belief that IPO shares will rise on their trading debut.”

China’s stock markets, which are among the world’s best-performing this year, have seen individual investors take a leap of faith to cash in on the rally. In July, individuals opened 2.43 million new trading accounts, according to data by the China Securities Depository and Clearing, taking the overall total to more than 170 million accounts, which is more than the population of Bangladesh. Retail traders also make up an estimated 70 per cent of China’s stock transactions.

New listings on the Star Market can rise and fall by any magnitude during the first five days of Trading. Photo: Reuters

Unlike markets elsewhere, short-selling is severely curtailed and offers very limited use to hedge against declines in China. In the previous episode of market catastrophe in 2015, the rout erased US$5 trillion of market capitalisation.

Contec Medical Systems, which manufactures medical instruments, skyrocketed 1,061 per cent to 118 yuan (US$17.25) when it debuted on the ChiNext board in Shenzhen on August 24. It was the biggest first-day gain this year. On Friday, the stock closed at 81.78 yuan, 30.7 per cent off its debut.

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