China to reopen IPO market

May 27, 2009

More than 30 firms ready to list once moratorium is lifted

Chinese regulators could lift the unofficial moratorium on IPOs as early as next month in an indication of Beijing’s growing confidence in the sustainability of this year’s stock market rally.

The China Securities Regulatory Commission (CSRC) called a halt to new issues in September last year in an attempt to stabilize markets as share prices collapsed because of the financial crisis. But as the benchmark Shanghai Composite Index has rebounded by more than 40 percent this year, the CSRC has indicated that it will allow new listings once draft rules designed to improve the IPO process are finalized after June 5.

The rule changes are designed to reduce the volatility that characterized the IPO market before the financial crisis hit, with new issues that were heavily oversubscribed soaring by lofty multiples on the first day of trading.

In a statement, the CSRC says the new rules will ‘diminish administrative guidance in setting IPO prices’ and ‘establish a market-oriented price-setting mechanism’, while also improving access for retail investors, who were often squeezed out of previous new issues in favor of institutional investors.

More than 30 companies have already secured approval-in-principle from the CSRC to float and are waiting for the moratorium to be lifted. Among the larger companies lining up to list are stockbroker Everbright Securities, China State Construction Engineering Corporation and China South Locomotive & Rolling Stock Corporation.

Analysts believe that if all these companies come to market they could raise more than 100 bn yuan ($15 bn) between them. The CSRC is likely to pace the resumption of IPOs to ensure this substantial injection of liquidity into the markets does not dampen the ongoing rally.

Vincent Chan, an analyst at Credit Suisse in Hong Kong, says that while ‘the late-2007 euphoria is unlikely to be repeated’ there will be two main groups of likely beneficiaries from the reopening of the IPO market.

‘They are the national champions, like China Mobile, CNOOC and China Telecom, which would probably act faster than others to get listed, and the companies with a very high gearing - mostly property companies - as an A share listing will help them improve their financial position,’ Chan explains. ‘Therefore, the new program should be good news and a potential catalyst for some underperforming and undervalued stocks.’

By Ben Bland