SHANGHAI China's shakey economic growth over recent months has helped persuade regulators to let select listed companies top up balance sheets through rights issues and private placements.
The relaxation will ease the pain for some cash-strapped firms but equity analysts worry that the recapitalizations will draw money away from other scrips in an already wobbly stock market.
The CSI300 Index .CSI300, which tracks the largest listed firms in Shanghai and Shenzhen is down over 8 percent so far this year, giving up most of its gains after a rally that began in December 2012 when the securities regulator signaled for a halt to initial public offerings.
With already listed companies given precedence to raise capital, the 600-plus firms still waiting to make IPOs will probably face a longer wait.
"Increased corporate recapitalization is diverting funds from existing shares, adding to relative liquidity tightness in China's stock markets," said Cao Xuefeng, head of research at Huaxi Securities in Chengdu.
"This shortage of funds will limit the market's ability to trade index heavyweights, capping the stock rebound and making conditions unfavorable for resuming IPOs."
On Thursday, China Merchants Bank (600036.SS)(3968.HK), China's sixth-largest lender, raised 27.5 billion yuan ($4.49 billion), just below a target of 28.7 billion yuan, through a rights issue of yuan-denominated A-shares listed in Shanghai on a 1.74-for-10 shares basis. It hopes to raise even more money through a similar rights issue for its shares listed in Hong Kong.
The bank had announced its plan for a rights issue two years ago as it needed to upgrade its capital adequacy ratios to comply with Basel III standards and improve its risk profile.
It is the biggest name to return to the money trough so far, but not the first.
Listed mainland firms raised 184.6 billion yuan ($30.16 billion) through public new share and rights issues as well as private placements during the first seven months of this year, up 53.5 percent from a year earlier, data from the China Securities Regulatory Commission (CSRC) shows.
Tellingly, 16 property firms, including Xinhu Zhongbao (600208.SS) and Beijing Urban Construction Investment and Development (600266.SS), have announced plans to recapitalize since the start of August, with combined fund-raising targets of 44.4 billion yuan.
The sector has been largely cut off from raising fresh capital due to government efforts to cool an overheated housing market, but the stack of applications lying with the CSRC suggest that is about to change.
"This is a clear sign that a ban on property firms' recapitalizing has quietly been lifted," said Zheng Weigang, head of investment banking at Shanghai Securities. "It's also part of a government relaxation of a sweeping clampdown on the property sector."
BALANCING DISCIPLINE AGAINST GROWTH
In the biggest and most controversial recapitalization over the past two months, BOE Technology 000725.SS proposed a 46 billion yuan placement to build new liquid crystal display (LCD) production lines. Shareholders approved the plan in mid-August.
Critics have said BOE has invested more than 100 billion yuan in LCD projects in recent years, with most funds being raised via placements, resulting in dilution of its shares even while yields have been very poor.
"Some companies have raised funds without making any returns for investors," said Zhang Qi, a senior analyst at Haitiong Securities in Shanghai. "Some even took big losses after squandering the funds raised, and that has caused strong discontent among investors."
Analysts are concerned that the surge in reissuance, if it carries on, will become a source of more disenchantment for Chinese retail stock investors.
Chinese equities have historically disappointed the country's investing class as they have underperformed China's wider economic growth rate.
Investors have to brave risks posed by markets frequently subject to distortions, in particular an IPO system twisted by state meddling and dogged by allegations of insider trading.
Just last month a scandal erupted as a trading error by a mid-sized brokerage, Everbright Securities, created then destroyed $100 billion worth of share value in the space of minutes.
Brokerages and economists have pointed to worrying signs that retail investors are abandoning stocks for higher yielding investments like real estate or wealth management products, or simply keeping their money under the mattress.
For the firms waiting to launch IPOs, it is unclear where they might find fresh funds. Overseas, appetite for Chinese assets has become more subdued. At the same time regulators have cracked down on alternative forms of fund raising like high-yield bonds and trust loans.
($1 = 6.1201 Chinese yuan)
(Editing by Simon Cameron-Moore)