Liquidity looms behind a gusher of PetroChina's IPO
Updated: 2007-11-12 10:32
The debut of PetroChina on the A-share market has made another world first created in China.
As it finished its opening day trading on the board in Shanghai on November 5, the country's leading oil and gas producer was crowned as the world's largest company after its shares surged 163 percent to hit 48.62 yuan (US$6.53).
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Though with profit of just half of that of rival Exxon, the company's combined shares were greater in value than the combined stock of Exxon and Royal Dutch Shell.
"It is ridiculous. As both are producers in a free trade global oil market, shares of PetroChina should not be so much more expensive than that of Exxon." Frank Gong, chief economist with JPMorgan Securities Asia-Pacific says.
Yet it is a record that can happen on the A-share market. The imbalance between stocks and liquidity on China's stock market - or limited share supply verses a flush of money at home with few channels for outflow - has pushed A-share prices, especially those of blue chips, to create continuing new highs. It was no exception for PetroChina.
In October of last year, after the Industrial and Commercial of China (ICBC) floated it's A shares in Shanghai, the market created the world's highest-valued bank, exceeding Citibank.
Five Chinese companies now rank in the top-10 largest companies by market value as calculated on November 5 due to their high prices on the A-share market.
China Mobile and the ICBC respectively rank No 4 and No 5, following Exxon and General Electric. Also among the top are Sinopec and China Life, ranking No 7 and No 10 respectively.
The P/E (price-to-earnings) ratio of the ICBC had reached 30 times in Shanghai, while its rival Citibank has a P/E ratio of 11 to 12 times. The disparity justifies investor worries that the market might have become too expensive.
"Comparatively, these companies' H shares traded in Hong Kong are more reasonable," Gong says.
For example, the H shares of PetroChina were trading around 17 yuan on November 5, while its A shares traded at a premium of about 150 percent over that.
"If the government does not find effective ways to siphon off excess money, it could lead to a bubble sooner or later," says Gong.
"In that direction, I am afraid that one day the mainland stock market might have to replicate the failure history of the Japanese stock market."
Some good news is that the stock market has been weighed down by expectations of further interest rate hikes, and the anticipation of a high October consumer price index, scheduled to be release tomorrow.
The People's Bank of China (PBOC) on Thursday announced it might use a variety of measures, including bank and treasury bond issues and reserve ratio requirements, to control the country's "severe" liquidity problem.
"China still faces severe situations on liquidity. The role of price levers will be strengthened while the use of interest rates and exchange rates policies will be more coordinated so as to stabilize inflation anticipation," the central bank said in its latest report.
The Shanghai Composite Index dropped as much as 4.85 percent on November 8, partly due to fears of further tightening measures, a perception strengthened by the PBOC report.
PetroChina retreated 5.54 percent that day to 38.19 yuan per share, shrinking more than 20 percent from its landmark debut in Shanghai four days before.
"Alongside the market situation, the fact that PetroChina will be included in the main index on November 19 also contributes to the drop," Tian Yan, analyst with Guoyuan Securities says.
The company will be weighted 25 percent in the Shanghai Composite Index in terms of market capitalization.
With that, it is expected to hinder investors from a heavy speculation out of concern that it may otherwise lead sharp fluctuations in the major index.
Excess liquidity is not a problem that can be handled at a short time, analysts point out.
"In fact, with the impact of the US subprime credit crisis and a looser monetary policy in the US, more hot money is expected to flow into Asian market, especially the A-share market," Liu Kan, senior analyst with Hualin Securities warns investors, adding last week's market correction may be temporary.
"It may rebound soon. Blue chips, especially State-owned large enterprises, which will benefit the most from a strong economy may continue to rise," he says.
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