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IPO quality not quantity
2006-08-14
China Daily
More blue chips are definitely needed to both help stabilize the Chinese stock market and accelerate its expansion. But it is also necessary to adjust the pace of new initial public offerings (IPOs) in line with the market sentiment, especially when a long-term rally is yet to take root.
The Air China debacle is clear evidence that the stock market is not ready to absorb all the IPOs planned for the second half of this year. Last week's incident should alert the securities authorities to the danger of ignoring the market reality.
In comparison with other blue chips such as Bank of China or small-size IPOs, which all attract hundreds of billions yuan during their IPOs over the past few months, it is really hard to call the IPO of Air China a success though the company insisted it was.
In response, the China Securities Regulatory Commission (CSRC) said that it would not slow or suspend IPOs. It is surely unwise for regulators to change the IPO schedule simply because of the special situation of one company.
Yet, Air China's IPO received the cold shoulder from the stock market not only for its own reasons. The high pricing relative to its return on investment and its less promising fundamentals all could have discouraged investors from subscribing. But an abrupt change in the market sentiment due to growing fears over too many IPOs is a more obvious cause.
To ensure smooth implementation of the ongoing stock reforms that address non-tradable State shares, the securities authorities had stopped all IPOs to help the market rebound from a four-year slump. When the one-year IPO ban was lifted three months ago, investors were showing renewed faith in the domestic stock market, believing that supply of quality new stocks would only make their investment more valuable. But amid a flood of IPOs, the market began to stumble, raising doubt about if the recent rally is the harbinger of a long bull market.
As part of the strategy for the long-term development, regulators should continue their programme of having large, high-quality companies raise funds on the domestic stock market. But that does not mean they could turn a deaf ear to the call by public investors for slower pace of IPOs.
The sound development of China's securities market hinges on the quality of listed companies as well as investor confidence in the market. The CSRC is responsible for both guaranteeing that only qualified companies will get listed and bolstering investor confidence with smart and aggressive regulation.
Investors' current dislike of fresh equity does not represent a denial of the necessity to reopen IPOs. Instead, it indicates only a temporary gap of understanding between the regulators and the investors about how to balance supply and demand in the stock market.
The regulators should learn to work to the rhythm of the market. Otherwise, a good cause, such as introducing much-needed quality stocks, could be quickly turned into an unnecessary destabilizing factor.
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