New Shanghai IPOs defy speculation restraints

By Reuters Staff
July 30, 2009

By Lu Jianxin and Edmund Klamann
SHANGHAI, July 30 (Reuters) – Two eye-popping debuts on the Shanghai Stock Exchange this week, its first listings in nearly a year, defied recent reforms to curb speculation and suggest China could struggle to keep asset price bubbles under control.

The persistence of boom-bust price swings for newcomers on China’s stock markets, after lifting a 10-month ban on initial public offers (IPOs), also bodes ill for hopes to build a stable market to serve the country’s fund-raising firms and to create a top global bourse.

“The latest IPO reforms have failed to hit their goals,” said senior stock analyst Zhang Qi at Haitong Securities in Shanghai. “The government is likely to use more means, such as increasing supplies of new shares, to cool the market.”

Sichuan Expressway’s yuan-denominated A shares more than quadrupled from their IPO price in intraday trading when they debuted on Monday, twice triggering exchange circuit breakers that temporarily halted trade.

That pushed the firm’s price/earnings ratio, based on analysts’ forecast profits for 2009, to as high as a stratospheric 61 times, compared with an average of 19 times for 15 expressway stocks listed on the Shanghai and Shenzhen bourses.

But after the debut party was over, the shares tumbled their 10 percent daily limit for three days before stablising, bringing big losses to some investors who bought on the first day of trade.

Similarly, shares in China State Construction Engineering Corp (CSCEC) surged as much as 90 percent on their debut on Wednesday, producing a forecast PE of as much as 50 times compared with a domestic industry average of 26 times.

The company, which raised $7.3 billion last week in the world’s biggest IPO in a year, rose a further 6.3 percent to 6.94 yuan on Thursday, but most analysts believe it is worth only around 5 yuan.

REAL DANGER
Ren Chengde, senior analyst at Galaxy Securities in Shanghai, said excessive speculation had put China’s stock market in real danger of inflating another bubble similar to that of 2006 and 2007, which burst spectacularly in 2008 when the benchmark Shanghai Composite Index plunged by two thirds.

“Risks are mounting as asset prices surge, propelled by huge liquidity in the system,” added money market analyst Yang Yongguang at Guohai Securities in Shenzhen.

“But regulators have their own difficulties: Facing an economy which is just seeing a budding recovery, any real monetary tightening must wait at least until the fourth quarter.”

Worries about potential asset price bubbles have mounted in China after bank lending surged to record levels in the first half of the year, with some of that money believed to have funded investments in stocks and property, while inflows of speculative funds from abroad appear to be picking up. [ID:nSP353481]

Market skittishness about a possible bubble, or government moves such as loan restrictions to forestall one, were apparent when the benchmark Index tumbled 5 percent on Wednesday in record turnover, surpassing volume on the New York Stock Exchange.

The index had surged 90 percent since the start of the year, spurring concerns share valuations had got far ahead of what corporate earnings potential could justify.

But Chinese officials have insisted they will not pursue monetary tightening anytime soon.

“(The central bank) will unswervingly continue to apply appropriately loose monetary policy and consolidate the economic recovery momentum,” central bank vice governor Su Ning said late on Wednesday. [ID:nPEK357846]

REGULATORS’ HOPES
Regulators had hoped to rein in speculation in new listings with a series of reforms adopted when IPOs were resumed last month, including circuit breakers to cool price moves.

They also slapped limits on the portion of IPOs available to big investors, in order to prevent price rigging.

But analysts said the huge ratio of shares changing hands on the debut day of trade — 90 percent for Sichuan Expressway and 70 percent for CSCEC — suggested that institutions and wealthy individuals continued to dominate the primary market, forcing small investors to buy new shares on the secondary market and thus sustaining the speculative fever for new listings.

The added that a dearth of investment channels, including a lack of derivatives such as stock futures and options, intensified the pursuit of the few items available.

Regulators are keen to build an orderly stock market in part to secure China’s place as a world financial power, filling a gap left by traditional centres battered by the financial crisis.

China stepped up the pace of reforms this year to improve its financial system, with a blueprint to make its financial hub in Shanghai a global financial centre by 2020.

And while efforts on IPOs have been a disappointment so far, Beijing is expected to take further action given ambitious plans to push a string of listings worth at least 100 billion yuan ($15 billion) onto the market this year.

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