CHINA MONEY-IPO resumption risks foundering on tight liquidity

Tue Jan 14, 2014 2:02am EST

Related Topics

* Resumption of IPOs risks aggravating liquidity squeeze

* Higher rates targeting shadow banking depressing stock indexes

* "Without money, nothing is possible" - analyst

* So far supportive measures have not inspired markets

* State media signals resolve on reform

By Lu Jianxin and Pete Sweeney

SHANGHAI, Jan 14 (Reuters) - The China Securities Regulatory Commission (CSRC) desperately wants the resumption of initial public offerings to inspire investors to return to the long ailing stock market.

Unfortunately, that goal stands in direct opposition to efforts by the central bank to tighten monetary conditions as it tries to restrain risky shadow banking activity.

The CSRC may permit as many as 500 firms to launch IPOs this year, with some estimating that they will raise as much as 200 billion yuan ($33.09 billion).

But as the People's Bank of China (PBOC) continues tightening liquidity, equities analysts and money dealers are asking where all this new cash is going to come from.

"Without money, nothing is possible," said Chen Huiqin, senior analyst at Huatai Securities in Nanjing.

Many equities investors have opposed the resumption of IPOs, arguing that new listings can only dilute the net market valuations, causing indexes to slide.

Worse, some money dealers fear large IPOs will lock up considerable amounts of cash, adding to strains in China's money markets and possibly provoking more dramatic spikes in short-term interest rates which could drag on the broader economy. That would tend to push down domestic stocks, putting a rally even further out of reach -- a sort of vicious cycle.

"China's stock market is still largely liquidity-driven," said Cao Xuefeng, head of research at Huaxi Securities in Chengdu. "So unless liquidity conditions improve significantly, there cannot be a reverse of fortune for stocks."

NOT COMING BACK

In the past, huge inflows driven by infrastructure spending by Beijing and overseas investment helped push the CSI300 Index to a record high in 2007 and set off another, lesser rally in 2009.

But those days are long gone. The CSI300 is down around 60 percent from its 2007 peak, and economists believe China's economy is entering a new era of higher interest rates as regulators move to mop up the sloppy liquidity that has supported stratospheric prices for housing, massive industrial overcapacity, and mired local governments and firms in debt.

Many investors saw another bull run on the horizon in November, when Chinese leaders announced the boldest economic and finiancial reform plans in decades, including stock market-boosting initiatives.

The news set off a micro-rally between late November and early December, which may have encouraged the CSRC to make the surprising announcement that the time was ripe to allow the resumption of IPOs, which had been suspended for over a year.

Unfortunately, markets did not applaud the decision, and started a precipitous decline on Dec. 5 that has seen the CSI300 shed over 12 percent so far.

The reaction highlights Beijing's conundrum; for the stock market to rally, new money has to flow into it, but money in China is now a very expensive commodity.

CALMING THE MARKET

Beijing has rallied its forces to talk up the market.

"IPOs are not poison," said the People's Daily, the mouthpiece of the ruling Communist Party of China, in a rare official commentary on Thursday, arguing against an opinion popular among retail investors that IPOs are inherently dilutive.

Other regulators, in particular the China Insurance Regulatory Commission (CIRC), have suggested they will guide more state money into equities, while "encouraging" already listed state-owned giants to buy back shares, propping up valuations.

Other analysts pointed to new policies allowing brokerages to offer retail investors margin accounts, which could theoretically allow more money into the market, facilitated by the implementation of new hedging tools and derivative projects allowing them to reduce their net risk exposure.

"IPO market reform cannot stop," read the headline of an editorial in the official China Securities Journal.

The authors rejected suggestions that IPOs be frozen again while kinks are worked out, arguing that liberalisations should be accelerated instead.

Few economists opposite the idea that liberalisation is the way forward, and that in the long run it can only benefit stock valuations.

But in the short, expensive money and tight liquidity will likely keep a lid on any dramatic recovery in China's stock markets. ($1 = 6.0434 Chinese yuan) (Editing by Kim Coghill)

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