A shares rally after China announces relaunch of IPOs

But the decision to resume fundraising could be a doubled-edged sword if new share sales siphon off liquidity from existing stocks

PUBLISHED : Tuesday, 10 November, 2015, 12:11am
UPDATED : Tuesday, 10 November, 2015, 12:11am

Beijing's decision on the weekend to reopen the initial public offering market seems to have ticked all the right boxes, with the A-share market rallying on Monday after the news.

The securities regulator and state media touted the resumption of new share sales as a positive move to support the mainland's economic transformation.

The China Securities Regulatory Commission suspended IPOs in early July as the authorities scrambled to stem a market rout that wiped out about US$5 billion of capitalisation.

The benchmark Shanghai Composite Index advanced 1.6 per cent on Monday.

The four-month suspension was the shortest of nine imposed on the A-share market.

Read more: China resumes initial public offerings after four-month break

CSRC spokesman Deng Ge said the IPO resumption was designed to invigorate the market, which had recovered its ability to self-adjust. Those comments suggested the regulator would continue to let market forces play a decisive role in share prices, rather than intervening with administrative measures.

"The regulator should be given credit for an immediate IPO resumption because fundraising on the capital market was badly needed to bolster the economy," Shanghai-based hedge fund manager Dong Jun said.

"But the chorus of positive comments in the media was overly optimistic."

As of Friday, the key indicator had advanced more than 20 per cent from August lows, with investors borrowing hundreds of billions of yuan to buy shares via the margin lending system. The market still faces a correction and the resumption of IPOs could be a double-edged sword. A fresh equity influx is set to knock the market off its heels because mainland investors habitually flock to new shares believing that IPO shares always surge on the first day of trading, siphoning off liquidity from existing holdings.

Economic fundamentals and corporate earnings are also unlikely to improve any time soon given the lower gross domestic product target unveiled by Premier Li Keqiang . Li is seeking to transform the world's second-largest economy, promoting technological innovation and entrepreneurship, rather than reckless spending on infrastructure, to spur growth.

When Beijing temporarily halted IPOs in July to stop fresh equity supply to the beleaguered market, it was expected to undermine the premier's push by cutting off fundraising for thousands of start-ups.

State-owned Shanghai Securities News said yesterday the resumption was a sign that the stock market "had gone back to normal" and IPOs could become a new driving force for a "new normal" growth model - a slower but a sustainable economy driven by consumer spending and an efficient commercial system.

"But it all comes down to whether the authorities will make a U-turn if another market slide takes place in the coming months," Haitong Securities analyst Zhang Qi said. "In the mainland market, stability is always a priority."

Read more: Politics' importance in getting China's markets back to normal

The CSRC also said it would fast-track preparations for a new IPO mechanism. Under the so-called registration system, the CSRC would relinquish responsibility for approving IPOs, while requiring listing applicants to disclose information to let the market decide their worth.

Analysts said it would still be some time before the new system took effect.