China IPO market dries up after bubble bursts

By Lu Jianxin - Analysis

SHANGHAI (Reuters) - When stocks in three big Chinese companies sank below their IPO prices this week, investors who bought shares in last year's offers suffered. China's once-roaring IPO market is another casualty.

After spectacular growth last year, when mainland China eclipsed the United States as the world's biggest market for initial public offers of equity, sliding stock prices and concern about oversupply threaten to stifle activity this year.

"The bubble is bursting after rampant speculation pushed prices of newly listed shares to ridiculously high levels at the peak of China's stock bull run late last year," says Zheng Weigang, head of research at Shanghai Securities.

"This will slow equity fund-raising in coming months and deter the overpricing of new offers and new listings."

Investors bought a staggering $100 billion of equity in almost 200 newly listing firms between May 2006, when China lifted a year-long ban on IPOs, and February this year.

The IPO flood, which saw many deals massively oversubscribed by frenzied investors, appeared to be a major achievement of China's financial reforms, for the first time making the stock market an important source of funding for many companies.

But a collapse of confidence, due to factors including slowing corporate profit growth and plans for huge cash calls by already-listed firms, has sent the main Shanghai index plunging more than 40 percent below October's record peak.

That led to a virtual halt in IPOs in March -- small laser equipment maker Fujian Fujing Casttech's 002222.SZ $53 million offer this month was the only one. By contrast, five firms raised $300 million in March last year.