Chinese investors are calling it a “dammed lake” (yanse hu 堰塞湖), the 800-plus Chinese businesses awaiting approval to list on mainland exchanges. The glut owes more to a recent moratorium on IPOs than it does to an out-of-the-blue need for capital among Chinese businesses. But the rising tide of fund-hungry companies encapsulates some of the biggest problems facing the Chinese market at present—among them, the chronic anemia of Chinese stock market performance, as well as volatile share prices.
Perhaps most of all, though, the dammed lake reveals the Chinese government’s opaque and usually ineffectual management of capital markets. The regulator, known as the China Securities Regulatory Commission (CSRC), decides which companies get to list, and when. Its calculus is more than strictly administrative, though, as it is known to use its approval discretion to influence market trends. Its favorite method is to tweak supply and demand through on-and-off-again bans on new listings.
But it’s a method that often backfires. In 2006 the CSRC lifted an almost year-long ban on IPOs. Fearing that the new offerings would drain money from existing stocks, investors sold off en masse, sending the market into its biggest slump in four years. In 2009, the regulator faced the opposite problem: a market overheated by the considerable chunk of the ¥5.8 trillion ($586 billion) government stimulus that had flowed into A-shares, as Chinese stocks are known. After a nine-month hiatus, the CSRC lifted the IPO ban in hopes of soaking up some of the excess. But new offerings whipped up still more froth, as companies like Sichuan Expressway saw their shares rise 300% on opening day.
That brings us to the present day. In November, the benchmark Shanghai Composite Index fell below 2,000 points, tumbling to its lowest point in nearly four years. Despite a recent rebound, China’s stock market stands out as one of the worst performers in the world in 2012, even as China’s economy remains one of its brightest. In an effort to avoid thinning out supply, the CSRC has alternated between being stingy with its approvals and banning IPOs outright.
That should change soon: investors and analysts expect the regulator to unstop the IPO pipeline come February (paywall), around the time of the 2013 Lunar New Year. But analysts say the market now is still so bearish that new equity will only exacerbate negative sentiment. The market has recovered its losses for the year, but enthusiasm for IPOs is still low. Chinese companies have raised ¥103.4 billion on domestic exchanges in the first ten months of this year, less than half of what was raised in 2011, according to CSRC data. To help companies, regulators have loosened requirements to list overseas and are encouraging companies to trade on over-the counter equity markets as well as sell bonds.
The longer-term worry, though, is whether the Chinese government will reform its IPO approval system to allow for more transparency and more reliable investor returns. Probably not, say analysts, pointing to corruption that permeates the system. “It doesn’t seem likely that the regulator could successfully reform the IPO system,” says Haitong Securities analyst Zhang Qi. “The market has long been a place for companies to raise funds while investors lose money.”
But the CSRC, which has pledged for years to remake China’s IPO system, may at least enact some valuable changes. Regulators say they are serious (audio interview from state-controlled outlet China Radio International) about protecting the country’s millions of retail investors, who have few options when it comes to investment destinations, by pricing IPOs accurately. The CSRC was previously accused of allowing companies to issue shares at artificially low levels. More recently, investors have lost money on overpriced shares by new issuers that then drop off dramatically after trading begins, a trend made worse by the rules concerning the “lock-up period” for IPO subscribers, which overwhelmingly favor the well-connected. China is reportedly considering a warrant system that would protect investors from losing too much.
All this signals that the regulator at least knows what the looming problems are. But whether that’s enough to offset the structural problems with China’s capital markets is another question entirely.