SHANGHAI China's plan to build confidence in domestic stock markets, and turn around their reputation as financial casinos, will depend on a regulatory gamble paying off next year.
Authorities have decided to lift a ban on new stock listings from as early as next month, wagering that a series of confidence-building measures announced recently will ensure healthy demand for the tide of new shares expected in 2014.
But if they are wrong, a flood of new listings could not only sink China's already-struggling bourses but also jeopardize a bigger reform goal: to ensure more money flows to where it is needed in the world's second-largest economy.
Early signs are not encouraging.
Chinese investors appear far from persuaded that their stock markets are on the threshold of a transformation into investment destinations that are worthy alternatives to bank deposits, property and other preferred homes for their long-term savings.
"We stock investors are all idiots! Idiots!" said a middle-aged man, who gave his surname as Li, speaking in a retail stock-trading room at a brokerage in downtown Shanghai.
"Why do we buy these things? The U.S. market is at an all-time high and the Chinese markets are down. When the U.S. market dives, we dive even further. As for the impact of the resumption of IPOs, my attitude is extremely pessimistic."
Though a market cannot thrive for long without new listings, China's freeze helped trigger a strong rally in early 2013 by choking the supply of new paper. The CSI300 index, made up of 300 stocks on the Shanghai and Shenzhen exchanges, gained over 30 percent in the first two months after the freeze.
The index has held onto some of its gains -- it is now up 12 percent since the IPO ban -- but its rally cannot disguise the fact that China's stock markets remain among the world's worst-performing bourses over the past two years.
With more than 800 new companies queued to tap the market -- and with Ernst & Young estimating that 200 billion yuan ($33 billion) will be raised in 2014 -- there are concerns investors will simply sell shares in existing firms to fund their IPO purchases, a zero-sum scenario for the overall market.
"I think in the short term the IPO resumption is negative -- in terms of sentiment at least -- and also you will see some capital drain because of the new listings," said Richard Gao, lead portfolio manager at Matthews China Fund (MCHFX.O).
Gao, though, believes a resumption of IPOs is essential to underpin confidence in the market in the longer term.
To build confidence ahead of the IPO resumption, authorities have announced plans to improve corporate disclosure, crack down on insider trading, hurry defunct stocks off the boards and vet IPOs to prevent newly listed "junk stocks" from replacing them.
China's securities watchdog has also moved to rid the IPO market of its shooting stars -- stocks that shine brightly on debut before dying out a few months later and trading below their issue price.
The China Securities Regulatory Commission has ruled that controlling stakeholders cannot sell their stock within two years of an IPO, a lockup that will be extended if it is trading below its issue price at the end of that two-year period. If firms make misleading statements during an IPO, their owners and underwriters may be forced to buy back shares.
However, brokerages complain that domestic retail investors, who account for most brokerage accounts and transaction volumes, remain sour on equities despite Beijing's recent blandishments.
The number of active brokerage trading accounts fell nearly 6 percent between January 1 and December 6. Worse, many accounts are inactive: exchange data shows 85 percent of open accounts conducted no trades in November, on par with previous months.
In theory, there is plenty of money to fund IPOs without triggering a sell-off of existing stocks: China had over 43 trillion yuan ($7.08 trillion) in personal savings deposits in October, according to central bank data, or roughly three times the total free-float capitalization of the Shanghai exchange and seven times that of the Shenzhen exchange.
The average Chinese household kept 57.7 percent of their money in the bank in 2011, 18 percent in physical cash and just 15.5 percent in stocks, according to a study by Chengdu's Southwestern University of Finance and Economics.
'INVESTORS AREN'T STUPID'
Not everyone subscribes to the scenario that resumption of IPOs will send Chinese markets lower and there is little question that new issues will attract investor attention, even if much of it continues to come from speculative day traders.
But even if markets hold up to the tide of IPOs, regulators still face a challenge to persuade long-term investors to accept volatile, short-term price movements in the belief that stock markets will deliver superior returns over the long run.
So far in China, this thesis has not held up.
Stock market returns have underperformed nearly every other form of investment and failed to track economic growth.
Other asset classes such as housing and high-yielding wealth management products have wildly outperformed stocks. According to the study by the Southwestern University of Finance and Economics, the mean return on investment for Chinese families on their first apartment was 340 percent in nominal terms.
Chinese indexes, on the other hand, peaked in October 2007 and have never fully recovered, with the CSI300 index still down nearly 60 percent since that time.
There has never been anything close to that sort of sustained correction in the housing market, and many believe Beijing can never allow one for political reasons. Similarly, many investors believe wealth management products, with returns of up to 25 percent, are also tacitly guaranteed by the state.
"Ordinary Chinese investors aren't stupid. They'll go where the best returns are," said Chen Xin, professor and stock specialist at Jiaotong University's Antai School of Management in Shanghai.
"Thing is, they think there's risk in stocks, but they don't realize there's even more risk in other asset classes." ($1 = 6.0718 Chinese yuan) (Additional reporting by David Lin and the Shanghai Newsroom; Editing by Mark Bendeich)