China IPO fever turns stock market into winning lottery
By Lu Jianxin and Pete Sweeney
SHANGHAI (Reuters) - China's new equity listings are once again plagued by rampant speculation even as regulators limit the amount stocks can "pop" on the first day of trade and curb other unfair practices.
The casino-like atmosphere of the stock market highlights the complex task authorities have in weeding out speculation and nurturing mature investment behaviour. The China Securities Regulatory Commission (CSRC) has said it wants to let the market have a "decisive" role in pricing new issues in future.
Since initial public offerings resumed in January after a 14-month hiatus, the shares of companies have surged, some by nearly 400 percent in the course of a few weeks.
Investors granted the right to buy into an IPO by lottery virtually have a golden ticket to sure-fire profit at low risk.
"Punters speculate for the sake of speculation, without taking into consideration corporate earnings performance," said a trader at a fund management firm, who cannot be quoted by name due to rules that ban fund managers from speaking to the media.
Every company that listed since June, when a second batch of approved IPOs debuted, has seen their stock repeatedly hit the maximum 10 percent daily limit, with most stocks doubling or tripling their IPO levels within a couple of weeks.
That distorts the operation of the stock market by causing money to pile out of existing shares, and also destabilises the money market by tying up massive amounts of cash in the escrow accounts institutions use to subscribe to IPOs.
STEP BACKWARDS
The feverish performance of IPOs has run counter to what the stock regulator has hoped for.
IPOs were frozen in late 2012 in part due to their tendency to rise by triple digits in a few weeks only to fall below their listing price and moulder there indefinitely.
That led to accusations that the market was rigged in favour of insiders, who could lock in quick profits and then leave ordinary shareholders holding the bag.
Latest regulations restrict the amount stocks can "pop" on debut and set guidelines on pricing. The proposed IPO price should line up against industry peers and not be out of sync with price-to-earnings (P/E) ratios of already listed peers, thereby discouraging fund managers from overpricing IPOs to benefit management teams and cornerstone stakeholders.
But tighter supervision and tougher rules have not deterred speculation. The 44-percent "limit up" applied to the first day of trade has made little difference - stocks continue to rise to stratospheric levels, only taking somewhat longer to do it.
Feitian Technologies Co Ltd <300386.SZ> has jumped as much as 340 percent from its issue price since its listing on the Shenzhen Stock Exchange in June. Wuxi Xuelang Environmental Technology Co Ltd <300385.SZ> is up more than 300 percent.
Of about 20 companies listed since late June, all have more than doubled with the exception of one, without enough time to rise given the market's 10-percent cap on daily gains.
This appears to have engendered a version of the "greater fool" investment strategy, in which investors buy shares not because they believe the shares should be highly valued, but on the assumption others will pay even higher valuations later.
In short, IPO fever has spread to a wider group of market participants.
"IPO reforms have so far been piecemeal," said Xiao Shijun, analyst at Guodu Securities in Beijing.
"Unless a registration system is in place, allowing the market to decide IPO prices, and investors to bear risk themselves, those reforms will not solve fundamental problems or quell rampant speculation."
Beijing has promised to implement a registration-based system for IPOs in the future, leaving it to the market to decide whether a new issue would be accepted or rejected and let investors bear the risk if IPO prices are high.
That will replace the existing approval system in which regulators decide which firms are qualified to list and when, as well as cap IPO prices using administrative guidance.
Such a system means that companies may need to wait for many years to list.
"Business opportunities are fleeting. I am really concerned that our capital-markets environment is ruining those chances for many good companies," Ding Yanhui, chairman of Shenzhen Absen Optoelectronic, was quoted saying by IFR Asia.
His company began trading on the Shenzhen exchange after waiting for eight years to list.
(Editing by Jacqueline Wong)
