China’s IPO extravaganza is back on the road after a nine-month hiatus, as has been widely reported in the last few days. As a perfectly-timed teaser for the resumption of mainland IPOs, news came on Tuesday that China Metallurgical is preparing a blockbuster double stock market listing in Hong Kong and Shenzhen, in what could be the world’s biggest IPO this year.
But on the regulatory front, as Lex notes, the state, like the Lord, gives and takes away.
As the FT reported on Monday, Beijing at the weekend decreed that every state-owned company that has listed in China since 2005 must transfer stock equal to 10 per cent of the shares offered to the National Social Security Fund. A similar requirement already covers listings of Chinese state-owned companies in Hong Kong and has made the state fund the largest institutional investor in the city’s stocks.
One key reason is Beijing’s growing concern about growing pressure on the fund’s assets as the proportion of China’s population over retirement age expands due to the government’s “one child” policy. The fund had lobbied for years to have the policy extended to companies listing on exchanges in Shanghai and Shenzhen to shore up fund assets, noted the FT.
Another reason for the new edict, which also applies to future listings, is the drive to ensure stability in the stock market as domestic IPOs start again this month after a nine-month suspension. Shares transferred to the fund will be covered by a three-year lock-up on top of any pre-existing lock-ups, to “strengthen investor confidence and benefit the long-term, stable and healthy development of China’s securities markets”, according to the State Council, China’s cabinet.
And, as Arthur Kroeber at Gavekal, the Hong Kong-based research and asset management operation, noted on Monday, Beijing’s the edict is also designed to support stock prices before shares locked-up under 2005-06′s share reform programme flood the market.
Under the new edict, a total of 826 state-owned institutions – including regional governments – are to transfer 8.394bn shares in 131 companies to the fund under the new policy, the government said. The shares are estimated to have a market value of Rmb63.9bn ($9.3bn) – not bad for a weekend’s work.
As Lex says, Beijing might appear to be simply switching shares from one pocket into another. But, and there is a big “but”, transferring shares without payment “raises issues, even when kept within the family”:
There may be no land grabs or oligarchs tossed into jail, as in Russia, but China is in effect ordering owners to surrender assets for free. This is unusual, even by China’s standards. When assets were transferred into China Investment Corp, the sovereign wealth fund paid for them via a complex bond financing.
Furthermore, notes Lex, not all owners are fully paid-up members of the state. According to CLSA, 11 are listed entities. The rest are state organisations that may nonetheless have their own joint ventures or projects that they had hoped to fund with the shares. The edict also sweeps local government-level funds upwards into the central pot.
In Lex’s view, the move “again reinforces the manipulated nature of China’s equity markets”:
Just as more shares are coming on-stream with the reopening of the local IPO market, so some are being taken off-stream. Shares transferred to the NSSF will be subject to a three-year lock-up. Yet another reminder that investors in Chinese stocks, like Job, need more than a bit of stoicism.
On top of its “10 per cent” edict, China’s securities regulator has tinkered with the rules on IPOs, notes Gavekal’s Kroeber: “Big institutional investors will not be able to subscribe to shares willy-nilly, while more retail investors will be able to subscribe during the book-building process.”
All of this, of course, is designed to rein in first-day price-ramping and dampen the market frenzy — but in Kroeber’s view, growing liquidity combined with pent-up demand make slow but steady gains unlikely.
Related links:
Beijing sets stage for resuming IPOs – FT
Chinese IPOs – Lex
Beijing orders stock transfer – FT
China Metallurgical prepares $2.7bn IPO – FT