* Stock market investors bid up rates to raise cash
* Little impact on wider money market seen
* Investors like IPOs for outperformance over indexes
* Regulators set to approve around 100 listings this year
By Pete Sweeney
SHANGHAI, June 19 Chinese investors hungry for cash to buy into
upcoming initial public offerings have turned to little-known overnight pledged
bond repurchase (repo) agreements for funds - driving up the cost of borrowing
nearly four-fold for the week, with the cost of borrowing for 24 hours as high
as 16 percent on Thursday.
"The main reason behind the performance of pledged repo rates in the
Shanghai Stock Exchange is the restarting of IPOs, with both retail and
institutional investors showing great enthusiasm for participation," said a
trader from a state-owned bank in Beijing.
Other commonly-traded instruments such as seven- and 14-day pledged repo
contracts have posted similar rises over recent days.
Pledged repos are a derivative fundraising tool used in China's stock
exchanges to raise funds for quick transactions, and the market has received
scant attention until recently.
A pledged repo transaction involves a customer pledging bond assets they own
as collateral to the repo issuer, which advances cash at a certain interest rate
for short periods.
Historically the pledged repo market has proven far more volatile than the
primary interbank money markets.
NARROW IMPACT SEEN
The rise in pledged rates, however, has not trickled into the much larger
interbank market, where benchmark instruments have yet to show signs of
pressure, and traders do not expect them to do so in the future.
The weighted average of the benchmark seven-day repo rate
stood at 3.12 percent on Thursday, up slightly from Wednesday but well within
The interbank bond market, dominated by banks and big institutional
investors, dwarfs those on the Shanghai and Shenzhen exchanges which are more
focused on retail investors.
Beijing allowed IPOs to resume in early 2014 after over a year-long hiatus,
letting nearly 50 previously-approved companies list.
Those new issues performed strongly, up by an average of 70 percent from
their IPO prices since listing in January and February, according to Reuters
In comparison, the CSI300 index, which tracks the largest firms
trading in Shanghai and Shenzhen, is down nearly 6 percent in the year to date.
Four companies have priced their IPOs so far, aiming to raise up to 1.7
billion yuan ($274 million), with listings expected soon.
But the total amount of funds raised looks set to fall short of original
expectations. The China Securities Regulatory Commission (CSC) has said it
intends to allow 100 companies to list, about half of the number projected by
While that is bad news for underwriters and investment banks, it is positive
for liquidity sentiment.
Massive IPO surges can put pressure on money markets, and in China they also
tend to dilute the net valuation of shares in the market as investors close out
positions in already-listed companies in order to buy new listings.
($1 = 6.2090 Chinese Yuan)
(Additional reporting by the Shanghai Newsroom; Editing by Eric Meijer)