China Pushes Big IPOs to Dampen Demand

Beijing hopes a slew of local mega-listings, similar to COSCO's, will help satisfy cash-rich mainland investors and soak up excess liquidity

by Frederik Balfour

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For the past couple of months government officials in Beijing have tried, with limited success, an assortment of administrative, legal, and monetary measures to cool investor ardor for mainland Chinese stocks. On Apr. 27 the central bank hiked interest rates 0.27% to make bank deposits a more attractive alternative to stocks. On May 29 the government tripled the tax levied on stock trades, precipitating a four-day, 16% plunge.

However the market soon clawed back most of its losses. The problem is, mainlanders with money don't have many investment options: They can hold bank deposits, where the return is not enough to offset inflation. They can invest in real estate, a market also at risk of overheating. Or they can buy A shares on the Shanghai and Shenzhen stock exchanges.

In another attempt to discourage investors from choosing the local equities markets, Beijing announced on June 19 that starting July 5 the government will allow local brokerages and fund management companies to invest in overseas stocks. The idea is to expand the choice of investment options for retail investors and thereby siphon off some of the liquidity pouring into mainland stocks.

Mega-Listings Soak Up Demand

But you'd be hard pressed to find much proof that these measures have dampened the appetite of mainland Chinese investors. The CSI 300, an index based on the most important stocks on the Shanghai and Shenzhen exchanges, has soared 96% so far this year. Some 27 million new brokerage accounts have been opened in China since the beginning of the year.

The government now is pushing ahead with initiatives intended to tackle more directly the problem of excess liquidity in the markets by encouraging mega-listings. On June 20 PetroChina (PTR), the country's largest oil and gas producer, announced it was planning an initial public offering in Shanghai that could fetch as much as $6 billion. China Mobile (CHL) also is expected to raise several billion within the next few months.

To date some $17.3 billion has been raised by mainland companies on the Shanghai and Shenzhen A share markets since the beginning of the year, but an accelerated program of new listings could go some way toward absorbing investor demand. "This helps increase the supply of shares on the mainland to mop up excess liquidity," says Jing Ulrich, chairman of Chinese equities at JPMorgan Chase (JPM).

Underlying Problems

Indeed, if the June 26 IPO in Shanghai of China COSCO Holdings is anything to go by, investor demand appears stronger than ever. COSCO's shares soared 93% the first day and climbed another 10% on June 27. So strong was demand for shares of COSCO, Asia's largest container shipping line, that the public offering was oversubscribed 106 times by retail and institutional investors who plunked down $214 billion for $1.96 billion worth of available shares. That's even more than the $190 billion tied up when investors tried to get shares of Bank of Communications when it raised $3.26 billion in Shanghai in April.

However Beijing's reluctance to relinquish control over the companies it lists may blunt the effectiveness of IPOs to address the imbalance between supply and demand for shares, says Vincent Chan, head of China research at Credit Suisse (CS). He points out that in the case of International Commercial Bank of China, which raised nearly $6 billion on Shanghai last year as part of a $21 billion dual listing in Hong Kong, the free float of shares available to Chinese investors amounts to just 2.7% of its share capital. "The listing of big cap stocks should not be token listings that could actually create more distortion" by creating a scarcity of tradable shares.

Frank Gong, chief China economist at JPMorgan Chase, argues that the problems of speculation and excess liquidity in the stock market will persist unless China solves underlying structural problems of a current account surplus and undervalued renminbi. As long as China continues to accumulate foreign reserves, the increased money will create an excess demand for financial assets.

However Gong does believe another measure under consideration to remove the tax on bank deposit interests could help stem the flight of money from bank accounts into the stock market. He argues that removing the current 30% tax rate would be equivalent to offering a 60 basis point increase in deposit rates, based on the existing one-year deposit rate of 3.06%.

Balfour is Asia Correspondent for BusinessWeek based in Hong Kong.