* China's first debut-day drop below IPO price in 3-� years
* $1.5 bln fundraising was 1st major IPO in China this year
* Weak debut seen sending warning to regulator
(Recasts with IPO details, background)
By Lu Jianxin and Farah Master
SHANGHAI, Jan 28 (Reuters) - Shares of China XD Electric Co, which raised $1.5 billion this month in a Shanghai IPO, unexpectedly fell in their trading debut on Thursday, serving a stark warning to China's securities regulator that it may have gone too far in trying to cool the overheating stock market.
Mainland investors, unhappy over heavy new-share supplies, pushed local-currency A shares of China's largest maker of electricity transmission equipment below their 7.90 yuan initial public offering price in early trading, the first time a stock has fallen on debut in about three-and-a-half years.
"The weak debut is actually good for the market as it shows investors' displeasure with the regulator for pushing too many new shares onto the market in the market slump," said Chen Huiqin, senior stock analyst at Huatai Securities in Nanjing.
Chinese authorities have been boosting the supply of shares to help cool the market as worries mounted over potential price bubbles.
The moves have contributed to a slump in China's stock market, cutting the average 2008 historical price earnings ratio on the Shanghai market to 26, which analysts and investors see as reasonable given China's improving economy and company earnings.
Chen and other analysts also said Chinese companies had tended to price their IPOs too dearly since the China Securities Regulatory Commission lifted an IPO ban last June, after the stock market recovered from the global financial crisis.
XD Electric (601179.SS) is the first mainland stock to drop below its IPO price on its debut trading day since August 2006, when Air China (601111.SS) breached its offering price before ending the first day of trade unchanged.
Such breaches have been extremely rare in the 19-year history of the modern Chinese stock market.
XD Electric raised 10.3 billion yuan ($1.5 billion) by selling 1.3 billion A shares, or 30 percent of its expanded capital, to become China's first major IPO this year.
It priced the IPO at a relatively modest 34 times 2008 earnings, compared with an average of about 50 times for Chinese IPOs over the past seven months.
Stock market debuts have traditionally attracted feverish speculative buying by mainland investors, although first-day gains by new listings in recent months have been relatively subdued as the IPO pipeline filled up and the market weakened.
China's stock market has recently been slumping under the weight of heavy new share supplies and government steps to tighten liquidity, with the benchmark Shanghai Composite Index .SSEC slipping 8 percent over the past six sessions before managing a 0.4 percent rise in Thursday morning trade.
XD Electric opened at 8.02 yuan on Thursday, a gain of only 1.52 percent from the IPO price compared with analysts' forecast that it would rise 15 percent, and slipped as low as 7.84 yuan in the morning session, down 0.76 percent.
The low values XD Electric at 34 times its 2008 earnings on a fully diluted basis, compared with a historical price earnings
(PE) ratio of 45 times for main rival Shanghai Electric Group Co (601727.SS) and a domestic industry average of 41 times. Analysts said the valuations were reasonable as China's electricity grid expansion was the fastest among the major global economies, fuelling hefty demand for power equipment.
Industry officials have said that China would spend at least 100 billion yuan to expand high-tension power transmission grids, a key sector supplied by XD Electric.
XD Electric kicks off what will likely be a busy year for Chinese IPOs, which PricewaterhouseCoopers forecast will raise more than 320 billion yuan in 2010, up 73 percent from last year.
China First Heavy Industries, the country's second-largest maker of heavy machinery, is launching an IPO in Shanghai this week to raise at least 8.4 billion yuan. [nTOE60K0BD]
(Editing by Edmund Klamann and Muralikumar Anantharaman)
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