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ASIA FOCUS : CHINA KNOWLEDGE
Declining IPO sizes are just one sign of bearishness, and retail investors burned in the past are likely to stay away
TIGER TONG
While Chinese investors enjoyed their long weekend as the dragon-boat festival became an official public holiday for the first time, they were caught off guard as the central bank announced it would increase bank reserve ratios by one percentage point to 17.5%. On June 10, when the market resumed trading, the Shanghai Composite Index plummeted 7.73% to 3,072.
Clearly, runaway inflation and the pace of investment remain the top concerns of the central bank. But as China's stock markets have never been a good gauge of the Chinese economy, liquidity tightening in the banking system could be the trigger for the big fall on June 10, but it is not the most important cause for the bearishness in Chinese stock markets in the past few months.
Back on Dec 8, when the central bank announced a one-percentage-point hike in bank reserve ratio, the market gained 1.38% on the next trading day. The only difference between the recent hike with that one is that at that time, another kind of liquidity was still plenty.
In 2006 and 2007, China's stock markets enjoyed a spectacular performance. As China's markets are highly liquidity-driven, a bullish market will bring in more liquidity and the bubble could become even bigger. Large amounts of money channelled through investment funds were among of the most important boosters. In 2006 and 2007, China investment funds raked in 388.8 billion and 464.2 billion renminbi respectively through initial public offerings (IPOs). In turn, the Shanghai Composite Index, which covers both A and B shares listed on the Shanghai Stock Exchange, shot up to 6,124 points on Oct 16, 2007. But the bubble started to burst. As of May 30, 2008, the index closed at 3,433, indicating a -34.9% year-to-date return, or 43.9% lower than the record high.
When the sentiment turned sour, the engine started to switch off and the market only fell at an accelerated speed. On April 30, even after extending the IPO period, the China Nature Innovation Pioneer Equity Fund, managed by China Nature Fund Management Company, received RMB 284 million in proceeds, an all-time low for an investment fund launched in China. RMB 200 million is the threshold to establish an investment fund. And the lukewarm response to China Nature Innovation is not an isolated case.
As of the end of May, 36 investment funds had closed their offerings (including three that started offerings at the end of 2007). Thirteen funds were still in the process of fund offering. In total, the 36 funds raised RMB 105.2 billion. The average IPO size was RMB 2.9 billion. In contrast, last year, 53 newly established funds raked in RMB 464.2 billion with a record-high average IPO size of RMB 8.8 billion.
Indeed from March, the sales size of investment funds has been reduced dramatically. At the beginning of 2008, E Fund Kexun Equity Fund, the first fund established in 2008, managed to rake in RMB 11.8 billion proceeds from IPO. After the average IPO size peaked in March with an average RMB 6.1 billion, this value reduced in April to RMB 2.0 billion. In May, it was further reduced to RMB 0.86 billion. While the devastating earthquake on May 12 was undoubtedly a contributing factor for the fall, the market itself is certainly the main reason.
Compared with the peak time in 2007 when tens of billions of dollars could be raised in a single day, fund managers have had to wait much longer this year. In 2008, there was only one fund accomplished the fundraising goal ahead of schedule. Since China Nature Innovation Pioneer Equity Fund extended the fundraising period in April, about 50% new funds had announced extensions of their IPO periods, which is unprecedented in China's 11-year fund management history.
At the same time, the Beijing government is still trying to adopt the loose-brake method by adjusting the speed of new fund approvals, to control market liquidity. Since March, the government has sped up the approval of new investment funds. But this kind of method is no longer effective. Hit by bearish markets, investors chose to turn away. Not only the average IPO size has been shrinking, the total funds raised have also been falling. Compared with the RMB 39.3 billion raised by 12 funds in March, another 12 funds only raised RMB 7.6 billion, or less than a fifth of the value in March.
As the Shanghai Composite Index is approaching the 3,000-point mark, the Chinese government is likely to take some measures to stimulate the market. The forthcoming Olympics might also inject some excitement. But for a market teeming with momentum investors, it is hard to stop in both directions. Vulnerable retail investors will not jump into the market again until they get a clear sign that a bull market is sustainable.
But unfortunately, along the road, there are too many things about to add to their woes, the US recession, the faltering Chinese property market, just to name a few. So in this sense, 3,000 points are not that significant. But similar to the situation in early October while many had expected the index to reach 8,000 or even 10,000, many might have lost faith at present. But it might be a good time to look at China stock markets again. After all, while your analyst may be a bear for the Chinese market, he is always a bull on the economy.
Tiger Tong is an analyst with China Knowledge, a premier provider of trade and investment information on China. Opinions expressed are his own.
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