SHANGHAI Five Chinese companies said on Monday they were postponing initial public offerings (IPOs), in a blow to Beijing's reformist drive to give market forces a "decisive" role in the country's stock exchanges.
The China Securities Regulatory Commission (CSRC) announced in late 2013 that it would move to give investors, not state officials, the primary role in deciding who gets to list and at what price.
But concerns about overpricing and insider cashouts appear to have convinced regulators they needed to step in to prevent the process from being corrupted, further damaging already shaky confidence in the country's stock markets.
"When I saw that the pharma deal had been pulled, it was honestly a bit depressing," said a Hong Kong-based investment banker, who declined to give his name because he is involved with underwriting deals in China.
"It just shows that the CSRC still has its hands held tightly on the tiller."
Along with its plans to abandon the current approval-based system for stock listings in favor of the kind of registration-based system employed in mature stock markets, the CRSC had also announced in December that it would allow IPOs to resume in January after being frozen for more than a year.
The decision was accompanied by a series of related reforms to the pricing of IPOs, and the initial wave of filings appeared promising, with the first two firms to start fundraising attracting massive investor interest.
But since Friday six companies have announced they will voluntarily suspend their listing plans. Sources told Reuters that in the case of drug maker Jiangsu Aosaikang, the suspension announced at the end of last week was the result of CSRC pressure. The CSRC has denied this.
The latest postponements followed a weekend announcement by the regulator that it would further tighten supervision.
On Sunday, the CSRC said that any company that priced its IPO at a premium to its industrial peers in the secondary market, measured by the respective price-to-earnings (PE) ratios, must delay opening subscriptions to retail investors by three weeks while it publishes repeated risk warnings.
It also said it would conduct random spot checks of book-building and road shows - the processes in which banks assess demand for offerings and then market the sales.
In response, five more companies put their IPOs on hold on Monday, citing the CSRC statement as the reason.
The five companies were NetPosa Technologies Ltd, Hebei Huijin Electromechanical Co Ltd, Nsfocus Information Technology Co Ltd, Beijing Forever Technology Co Ltd and Ciming Health Checkup Management Group Co Ltd.
"If you want to allow the market to set prices, the market has to work properly, and clearly the market is not working properly," said Wei Yao, China economist at Societe Generale in Hong Kong. "This is a way of sending a warning to the market that the CSRC is determined to get what it wants."
Nevertheless, it is doubtful that the CSRC is happy about headlines highlighting problems so early, given than there are nearly 750 more companies still queued to list.
"The latest statement by the CSRC won't do much to change the fact that IPO reforms appear to have failed," said Zhang Qi, senior stock analyst at Haitong Securities in Shanghai.
"For example, the new reforms permit existing shareholders to cash out at the IPO, while in the past they needed to wait for lock-up periods to expire before selling. This has only encouraged issuers and underwriters to price their IPOs as high as they can."
Analysts pointed out that the bulk of the shares to be sold during Aosaikang's IPO were existing shares held by management, not new issues. That, plus the fact that the shares were priced much higher than industry peers, suggested insiders were trying to offload stock at an artificially high premium, they said.
Zhang said that in some cases during the book-building process he had seen the highest quotes come in four or five times above the lowest quotes, which he said suggested someone was trying to manipulate the IPO price.
"These ridiculous ranges mean small investors will be forced to buy IPO shares at unreasonably high prices," he said.
This would mark a failure to resolve a recurring problem in China's IPO market: the tendency for shares to debut with exuberant "pops", or jumps in price on listing day, but fall below the IPO price soon afterwards and stay there indefinitely, benefiting insiders who participated in the IPO at the expense of ordinary investors.
BACK IN CHARGE
The problem is that by managing the market for the benefit of small investors, the CSRC is by definition moving away from letting it operate independently.
But for now, economists don't think China has much choice, given distortions in other parts of the market.
For example, many Chinese executives at companies in line to list grew up in a far more opaque business culture, when the IPO process was primarily intended to facilitate fundraising and industrial consolidation at state-controlled monopolies.
But forcing managers to change their attitudes is far more difficult.
"It's not the job of the regulator to say how you should manage your company," said Steve Wang, China analyst at Reorient Research in Hong Kong. "That's between you and your investors."
In addition, the depth of Beijing's commitment to market reform remains untested. China has committed to pushing market reforms, but it has not suggested that the state is abandoning what Chinese conservatives see as a fundamental responsibility to manage the economy.
Chinese equity indexes have been some of the world's worst performers in recent years, with many domestic investors souring on Chinese stocks in general given the market's reputation for insider trading and price manipulation.
The CSI300 Index .CSI300 has lost nearly 11 percent over the last four weeks since IPOs resumed, and it is down more than 19 percent since markets peaked in February 2013 in response to the IPO freeze.
Indexes eased slightly again on Monday, with the CSI300 down 0.2 percent at midday.
(Additional reporting by Michael Flaherty; Editing by Alex Richardson)