* Speculation in new IPOs destabilises markets from time to
* New listings double or triple despite regulatory curbs
* CSRC retreat from reform adds to rampant speculation
* Solution lies in thorough reforms: IPO registration system
By Lu Jianxin and Pete Sweeney
SHANGHAI, Aug 12 China's new equity listings are
once again plagued by rampant speculation even as regulators
limit the amount stocks can "pop" on the first day of trade and
curb other unfair practices.
The casino-like atmosphere of the stock market highlights
the complex task authorities have in weeding out speculation and
nurturing mature investment behavior. The China Securities
Regulatory Commission (CSRC) has said it wants to let the market
have a "decisive" role in pricing new issues in future.
Since initial public offerings resumed in January after a
14-month hiatus, the shares of companies have surged, some by
nearly 400 percent in the course of a few weeks.
Investors granted the right to buy into an IPO by lottery
virtually have a golden ticket to sure-fire profit at low risk.
"Punters speculate for the sake of speculation, without
taking into consideration corporate earnings performance," said
a trader at a fund management firm, who cannot be quoted by name
due to rules that ban fund managers from speaking to the media.
Every company that listed since June, when a second batch of
approved IPOs debuted, has seen their stock repeatedly hit the
maximum 10 percent daily limit, with most stocks doubling or
tripling their IPO levels within a couple of weeks.
That distorts the operation of the stock market by causing
money to pile out of existing shares, and also destabilises the
money market by tying up massive amounts of cash in the escrow
accounts institutions use to subscribe to IPOs.
The feverish performance of IPOs has run counter to what the
stock regulator has hoped for.
IPOs were frozen in late 2012 in part due to their tendency
to rise by triple digits in a few weeks only to fall below their
listing price and moulder there indefinitely.
That led to accusations that the market was rigged in favour
of insiders, who could lock in quick profits and then leave
ordinary shareholders holding the bag.
Latest regulations restrict the amount stocks can "pop" on
debut and set guidelines on pricing. The proposed IPO price
should line up against industry peers and not be out of sync
with price-to-earnings (P/E) ratios of already listed peers,
thereby discouraging fund managers from overpricing IPOs to
benefit management teams and cornerstone stakeholders.
But tighter supervision and tougher rules have not deterred
speculation. The 44-percent "limit up" applied to the first day
of trade has made little difference - stocks continue to rise to
stratospheric levels, only taking somewhat longer to do it.
Feitian Technologies Co Ltd has jumped as much
as 340 percent from its issue price since its listing on the
Shenzhen Stock Exchange in June. Wuxi Xuelang Environmental
Technology Co Ltd is up more than 300 percent.
Of about 20 companies listed since late June, all have more
than doubled with the exception of one, without enough time to
rise given the market's 10-percent cap on daily gains.
This appears to have engendered a version of the "greater
fool" investment strategy, in which investors buy shares not
because they believe the shares should be highly valued, but on
the assumption others will pay even higher valuations later.
In short, IPO fever has spread to a wider group of market
"IPO reforms have so far been piecemeal," said Xiao Shijun,
analyst at Guodu Securities in Beijing.
"Unless a registration system is in place, allowing the
market to decide IPO prices, and investors to bear risk
themselves, those reforms will not solve fundamental problems or
quell rampant speculation."
Beijing has promised to implement a registration-based
system for IPOs in the future, leaving it to the market to
decide whether a new issue would be accepted or rejected and let
investors bear the risk if IPO prices are high.
That will replace the existing approval system in which
regulators decide which firms are qualified to list and when, as
well as cap IPO prices using administrative guidance.
Such a system means that companies may need to wait for many
years to list.
"Business opportunities are fleeting. I am really concerned
that our capital-markets environment is ruining those chances
for many good companies," Ding Yanhui, chairman of Shenzhen
Absen Optoelectronic, was quoted saying by IFR Asia.
His company began trading on the Shenzhen exchange after
waiting for eight years to list.
($1 = 6.15 Chinese yuan)
(Editing by Jacqueline Wong)