Restart of IPO,Fortune or Misfortune?

China will resume its initial public offering on main board before launching a NASDAQ-style second board for start-up companies.

After eight-month pause of initial public offering (IPO) from last September, the Chinese Securities Regulatory Committee (CSRC) published the Guiding Opinions on the Further Reform and Consummation of the New Stock Issuance System (hereafter Guiding Opinions) on June 10 and it was carried out on the next day. This meant China will restart the new stock issuance which has been paused for a long time.

On June 5, the Shenzhen Stock Exchange published the Rules of the Listings on the Second Board which will be carried out on July 1. This means that the second board which has been under preparation for ten years is also coming out.

It is generally believed that the IPO will be resumed at the end of June and the second board will be launched after the IPO on main board. With the restart of IPO and the coming listings on second board, the market is alert on the impact from the expansion of stock market.

On the first exchanging day after the appearance of the new rules on IPO, the two stock exchanges market in Shanghai and Shenzhen both saw a decline, Shanghai Composite Index dipped by 0.67% to below 2800 points. The volumes of the two markets both shrank a lot compared with a day before. This triggered the worries about whether the new bull market situation will be ended because of the restart of the IPO.

Opportunities for Restarting IPO

On May 22, the CSRC began to ask for the public opinions for the Guiding Opinions. During the 5 days of consulting for the public opinions, four forums or conferences were held by the related government departments and individual investors.

The financial commentator Ye Tan said that the hot capital market should make contribution to the cold entity economy. The capital market in China is quite prosperous. The scale of banking credit can not be enlarged. The international capital has already fixed their eyes on the profit in China’s capital market. Therefore, the best choice is to conduct financing in the stock exchange market. The restart of IPO is like washing a heated thing with cold water, lowering the assets bubble and deflation expectation. It can also reduce the burden of the banks. According to an expert, the new stock issuance may force the stock index to go down but will not freeze it.

Some analysts thought that the improving fluidity of capital and the enthusiasm of the investors will provide good market environment for the restart of IPO. The People’s Bank of China (PBOC) has no plan to lower the fluidity. And, with the recovery of the market, the market deals will be vigorous again. The investors’ enthusiasm in opening accounts is also increasing.

According to the official data, 351.8 thousand new accounts were seen in the A share market in the first week of June, up 7.7% compared with a week before. It is also the highest in recent six weeks. 196.53 million new accounts took part in the deals in the A share market, up 55.09% compared with a week before. The number of position accounts suffered its first decline after three straight weeks’ increase.

In addition, the activities of the stock administration departments also improved the capital flow. For example, it is faster for the new funds to be approved for issuance; after one year’s nonofficial pause of QDII quota examination and approval, ICBC Credit Suisse Asset Management Co., Ltd. became one of the first special accounts which can be officially put into QDII operation whose scale exceeds 15 billion yuan (USD 2.19 billion).

This shows that the government has certain confidence in the role of recovering national economy in supporting the future stock market composition. What is more important is that the core meaning of the capital market is to realize the optimized allocation of social resources. The long-term pause of the new stock issuance means that the market has been “ill” and lost its function of financing. Only the capital market where the IPO is available can be said to be a healthy market.

The introduction of the second board is to help the small and medium-sized enterprises (SMEs) to deal with the difficulties in financing and to provide them with the new financing channel in the capital market. Most of the 4-trillion-yuan stimulus package and the increasing credit loans are invested into the large projects and enterprises. The local governments’ investments are also put into the local key projects and enterprises. Many SMEs have received no support from those financial policies.

“Little Use” of New Stock Issuance Reform

The difference between the new rules of IPO and the old ones is that the CSRC conducted a reform to the new stock issuance system. However, this progressive reform was criticized to be of little use.

According to the reports from the market, the new stock issuance reform includes four aspects: the first one is to consummate the restriction system of enquiry and subscription pricing to form a more market-oriented pricing system; the second one is to optimize the online issuance system and to differentiate the online and offline subscription; the third one is to set upper limits on the single online subscription account, which principally should not buy more than one thousandth of the stocks issued online; the fourth one is to make clearer notes about the risk of subscribing for the new stocks.

The current new stock issuance system has four defects to be scolded: the first one is the disjoint link between the new stock issuance pricing and the second market prices, which results in the legend that “the new stocks always have good performances”; the second one is that the supply of issued stocks can not satisfy the demand, resulting in the hard placing of the new stocks; the third one is the extremely strict stipulations on the lock-up period of the promoters’ shares and the stocks acquired by the offline placing organizations, resulting in the lower share ratio in circulation; the last one is that the new stock issuance should be approved by the government, making the new stock issuance system become the administrative tools of the government in adjusting the market and cutting off the natural connection between the securities market and the entity market.

Looking at those defects, we can see that this reform can resolve some problems. For example, the small and medium investors may get more profits from the new stock issuance. Meanwhile, the price gap in the first-tier and second-tier markets can also be reduced. However, a lot of problems remain unsolved, like the extremely low proportion of the IPO in the new stock issuance.

It is stipulated in the Securities Law of the PRC that the proportion of IPO in the stock issuance of the enterprises registered in Mainland China should not be less than 10%, much lower than the international proportion of 20% to 25%.

Ye Tan pointed out that the new stock issuance reform doesn’t focus on solving the problems of original share issuance and increasing the proportion of shares in circulation. Meanwhile, it missed the most important point the marketization of the new stock issuance system. The main target of this reform is mingled with the determination of marketization and the compromise with the public requirements of caring more about the small and medium investors. “The changes of polices have no core meanings. The speculating policies will become the seed of another new stock issuance reform in the coming two or three years.”

The Influence Is Uncertain

The discussion about the influence of the restart of IPO upon the main board has never stopped.

Most stock dealers said that the restart of IPO can not change the inherent performance pattern of the A share market. The middle-term trend of the market will take an upward trend after concussion. According to the previous experience, a back fall will appear after the restart of IPO. When the concussion or bear market happen, there will appear a low point in two or three months after the restart of IPO lower than the lowest point before the restart. When the bull market happens, the extent of back fall will be lowered. But if you compare the market situations one year after and before the restart of IPO, you will find that the restart of IPO can not change the performance pattern of the main board. The macro economic situation and market condition play the main roles in long-term moving trend of the stock index.

Besides, the market has foreseen the restart of the IPO. Though there is real short-term impact from the IPO to the market, the influence is quite small. The restart of IPO will not change the middle-term trend of the stock market, which is upward rebound after concussion. The driving force of the market rebound comes from the capital fluidity, stimulus policies and the forecast of economic recovery. The restart of IPO may increase the stock supply but will not change the entire situation that the capital is sufficient.

Bohai Securities has an optimistic opinion that the restart of IPO is good for the market. The fluidity in the previous period increased the estimated value of many small- and medium-cap individual shares, enabling the market to assume certain stress from structural estimated value. The issuance of the new stocks can undoubtedly change the situation through the capital re-distribution to further consolidate the foundation for the increase in the market. The restart of IPO can resume the market’s financing function and enrich the number of investment projects, as well as the selection space for the investors. This is good for promoting the healthy competition and improving the governance structure and information disclosure system inside the companies.

China Merchants Securities holds a pessimistic view. The healthy recycling of macro economy in China is taking on a strengthening trend. But previously the growth extent was too large and; furthermore, too many non-tradable shares were released in July, China’s A share market has to face great adjustment stress in a short time. The new policies of IPO will increase this stress.

Minsheng Securities said that the restart of IPO will speed up the inherent adjustment in the market. Firstly, the restart of IPO is faster than the market expectation. Therefore, the market expansion stress increases a lot. Previously the market thought that the IPO of the main board is later than the second board. Secondly, the start of the second board is good for distracting people’s attention from the IPO on the main board and will guide the capital to the blue chips. Thirdly, the IPO will cause more changes to the capital supply. Therefore, the restart of IPO will be the most austere test for the rebound of market in a short time.

Psychological Stress Is Bigger than Capital Stress

There are opinions that a certain amount of capital is needed for the issuers to acquire the financing fund, to encash the subscription profit in the special first-tier market and to keep the new stocks vigorous. The IPO has exerted little influence in the short-term capital distribution, but with the continuous issuance of the new stocks, the accumulated influence on the market can not be neglectful.

The CSRC approved 33 companies to be listed in the A share market in 2008. Those companies will be listed soon and the total number of the stocks will reach 14.4 billion stocks, with the accumulated value of 72.2 billion yuan (USD 10.6 billion). In addition to the second board, the total amount of financing will exceed 100 billion yuan (USD 14.6 billion). In consideration of the market capacity, the CSRC will have to fix a proper time of restarting IPO and determine the proper scale of initial financing.

Judged from the short-term capital supply, the organizational investors like the public funds are still in a low position level. Meanwhile, 41 funds were established in the first five months of 2009, which accumulated the capital with the total amount of 100.98 billion yuan (USD 14.8 billion), larger than a year ago. It meant that the issuance of new funds has begun to rally from the bottom with the continuous rebound of the stock market. Therefore, the restart of IPO will bring more psychological stress for the investors than the real capital stress. There will be a large fluctuation in the stock price. The performance of the A share market will depend on the recovery of the macro economy.