China IPO revival to extend bond market slump

The mainland's plans to restart initial public offerings after a one-year break and allow firms to sell preferred stock will soak up cash and extend a bond market slump into next year, according to its largest brokerages.

The central government's benchmark 10-year bond yield has climbed 93 basis points since the end of June, the biggest half-yearly surge on record, as plans to allow the market to play a greater role in setting interest rates drove borrowing costs higher.

The notes snapped a seven-day rally on Monday after the securities regulator indicated it would end the offering freeze and start processing applications from a queue of more than 760 companies.

"New stock offerings will be attractive because of cheaper valuations, and they will have good growth prospects as they're likely to be linked to China's new economy," said Zeng Xianzhao, an analyst at Everbright Securities. "They will definitely undercut the appeal of bonds as risk-averse investors may consider buying cheap stocks."

Banks from Credit Agricole CIB to Nomura warn rising borrowing costs may drag on growth in Asia's largest economy as policymakers seek to implement the most far-reaching policy changes since the 1990s.

Small-cap stocks slumped this week on concern the offerings will divert funds from existing equities, while the China Securities Regulatory Commission's (CSRC) plan for a trial preferred-share programme will provide another alternative to bond-market investments.

The mainland first signalled a move to overhaul the flotation process in a 60-point statement released after a Communist Party meeting last month where leaders pledged to give market forces a "decisive role" in allocating resources.