Liquidity woes loom over A shares

Stock information is displayed at a trading hall of a securities firm in Shanghai.[Photo/Agencies]

As much as 3.2 trillion yuan may get locked up due to 10 IPOs this week

Ten companies will offer new shares through initial public offerings this week, potentially raising 4.29 billion yuan ($670 million), analysts said.

But what's worrying regular punters is the fact that the current IPO rules require prospective investors to make full payment in advance for share subscription. This could mean the 10 IPOs could lock up as much as an estimated 3.19 trillion yuan before the actual share allocations, analysts said.

It is a prospect not every investor would relish because the attendant liquidity crunch will likely hurt China's A-share market, they said.

"The IPOs could have a negative impact on the market, which could aggravate the market volatility," said Dai Jupeng, a strategist at Sealand Securities Co. "Risks will likely concentrate on the high-growth stocks with excessive valuations in the short term."

The latest batch of IPOs offers the last possibility for investors to earn handsome returns on investment in new shares under the existing system.

The country is moving toward a registration-based IPO mechanism. The new system could entail a flood of new listings and cheaper valuations, analysts have been saying.

The State Council, China's Cabinet, announced last week that the stock exchanges will launch the registration-based IPO system once the country's top legislature approves it.

The market believes the legislature will likely give its approval by the end of this month.

The China Securities Regulatory Commission, the country's securities watchdog, said the reform of the IPO system will be gradual. The regulator also assured the new system won't cause a deluge of IPOs that could burden the market.

To accelerate the reform of floats, the CSRC in November streamlined the current IPO process by scrapping the requirement of advance payment when investors subscribe to new shares.

But this reform will take effect sometime next year, which means this week's IPOs will still require investors to make advance payments.

The regulator also simplified the pricing procedure for small-cap IPOs under 20 million shares, which will help reduce the financing costs of smaller companies.

"The new IPO mechanism will be less administratively controlled and more market-driven, which will help reduce the risk of rent-seeking and curb irrational speculation in investing in IPOs," Chinese investment bank Guotai Junan Securities Co Ltd said in a research note.

Haitong Securities Co Ltd forecast that new IPOs next year will raise about 400 billion yuan. Although the reform of the IPO process will be gradual, the regulator would still manage the IPO supply initially, it said.

"We remain optimistic about the A-share market in the mid term. A low interest rate environment will continue, meaning that more assets will be allocated in the equities market," the brokerage said.

IPOs resumed in early November after a five-month suspension. Ever since, the A-share market has experienced increasing volatility even though the benchmark Shanghai Composite Index traded sideways around 3,500 points.

While the stock markets may continue to fluctuate next year, analysts say new investment opportunities may emerge in the undervalued large blue-chips in property and financial services, which may benefit from any government stimulus package.

Bloomberg reported last week China plans to encourage small- and mid-sized cities to offer rural residents subsidies and tax cuts to buy their first homes in urban areas as part of measures to trim inventory of unsold homes.

"The investors will follow closely the government policy to stimulate the property market. We have noticed that funds have been actively allocated to the big-cap blue-chips," said Dai of Sealand Securities.