Zhang Xiuli says she knows nothing about the nine Chinese companies that held initial public offerings last month.
Not a problem. Zhang, 37, tried to buy shares in each and every one, confident that she knew what was coming next: an immediate surge in price that has rewarded investors in Chinese IPOs with an average first-day gain of 43 percent this year. Her orders were among 655 billion yuan ($106 billion) of bids for 3.2 billion yuan of new shares, an over-subscription rate 28 times bigger than that of Agricultural Bank of China Ltd.’s listing at the height of the nation’s IPO boom in 2010.
New stocks have regained their reputation as can’t-lose bets in China just four years after that last frenzy ended badly — a majority of IPOs in the second half of 2010 saddled investors with losses within a year. The soaring demand shows how regulatory efforts to ensure deals aren’t overvalued have led speculators to ramp up bets with borrowed money and hurt plans to let the market, rather than the government, set prices in the biggest emerging economy, said Ding Yuan of the China Europe International Business School.
“The relationship between demand and supply is distorted,” Ding, an accounting professor at CEIBS in Shanghai, said by phone. “Fundamental analysis is meaningless because prices are kept low.”
The IPOs underline the challenges facing China’s ruling Communist Party after President Xi Jinping pledged in November to give markets a “decisive” role in the $9 trillion economy as part of the most sweeping set of reforms since the 1990s.
At stake is the country’s ability to keep home-grown companies such as Alibaba Group Holding Ltd., the e-commerce company preparing a U.S. listing, on local bourses and increase the participation of foreign institutional investors in a market where individuals account for about 80 percent of trading.
The China Securities Regulatory Commission didn’t respond to a faxed request for comment.
The perception that IPOs are riskless has encouraged some investors to use borrowed money, exposing them to deeper losses once prices stop climbing, according to Lin Jin, a senior analyst at Shenyin & Wanguo Securities Co. in Shanghai.
China’s benchmark money-market rate rose the most in three weeks on July 23 as orders for five IPOs spurred an increase in demand for borrowed funds. The central bank said yesterday that the deals helped fuel a record drop in local-currency bank deposits last month as customers shifted funds to their brokerage accounts.
“The main risk is whether borrowing costs can be covered,” Lin said. “As new share sales become the norm, the effect will taper off and returns will decrease.”
Investors’ rush into Chinese IPOs, which have rallied an average 94 percent from their issue price this year, or seven times more than the global average, contrasts with lackluster demand among local investors to participate in the broader stock market. Traders have liquidated about 1.3 million mainland equity accounts since the end of March, leaving the number of funded accounts at a four-year low of 52.55 million.
The benchmark Shanghai Composite Index has gained about 5 percent this year, versus a 6.8 percent increase in the MSCI Emerging Markets Index. The mainland gauge has dropped 29 percent during the past five years, compared with a 25 percent advance for the MSCI measure.
All nine companies that had IPOs last month sold shares at price-to-earnings ratios below the industry average, according to data compiled by Bloomberg. The regulator requires any firm pricing stock at levels above their peers to postpone the offering by three weeks and issue risk warnings to investors.
Guangdong Taicheng Pharmaceutical Co., a traditional Chinese medicine company based in the southern province of the same name, attracted bids worth 337 times the 350 million yuan of shares for sale after pricing the IPO at 17.5 times earnings, about half the average level of listed rivals. The stock has more than doubled since it began trading July 31.
“The Chinese market is about speculation,” said Teng Bingsheng, associate dean at the Cheung Kong Graduate School of Business in Beijing. “That’s why very small companies can be pushed up, even with small amounts of money.”
Two more Chinese IPOs start taking orders this week. Changbai Mountain Tourism Co. plans to raise 302.7 million yuan, while Kuaijishan Shaoxing Rice Wine Co. is offering 443 million yuan of shares.
The CSRC has said it’s preparing to move toward an American-style IPO registration system and may announce a plan by the end of the year. The new framework would ensure issuers meet disclosure requirements, leaving investors to judge if companies are fairly priced.
Ling Jiong, a 32-year-old health-care industry worker in Shanghai, makes sure to read through IPO prospectuses and analyze company fundamentals before bidding. She still says investors should sell within the first few days of trading.
“If I am lucky to win IPO shares through the lottery, I will sell them three days after listing, given my experience that the good performance of new shares won’t last too long,” said Ling, who bid about 40,000 yuan on IPOs this year without getting a single allocation.
Neway Valve (Suzhou) Co., China’s first initial public offering in 2014, jumped more than 40 percent on its first day of trading in January. The maker of industrial valves has since slumped, paring its gain since the debut to about 9 percent.
Past IPOs have rewarded investors for selling shares on the first trading day while penalizing longer-term holders, according to a study from Credit Suisse Group AG, which looked at 437 mainland offerings from the start of 2011 through Nov. 28, 2012. Investors had an average gain of 23 percent if they sold IPO shares after one day of trading, while losing an average 42 percent if they held for a year, the study showed.
AgBank has lost 6.3 percent since its July 2010 listing in Shanghai, versus a 29 percent gain in the MSCI All-Country World Financials Index. Of the 174 Chinese IPOs tracked by Bloomberg in the second half of 2010, 92 were trading below their offering prices after a year.
China’s financial markets are still underdeveloped in part because some policy makers think they must “control everything,” said Cheah Cheng Hye, the Hong Kong-based chairman of Value Partners Group, which manages about $10.5 billion. The nation’s markets will only become more stable as authorities loosen their grip, said Cheah, whose firm runs the top- performing Greater China equity fund tracked by Bloomberg in the past five years.
“In the meantime, since we are managing money for our clients, we will continue to participate in the IPO game like everybody else,” he said.
Zhang, the investor who has tried to buy shares in all of this year’s IPOs, agrees. She’s sitting on about 10,000 yuan of gains after her bids were successful on just one of the deals.
“It’s totally worth getting in,” said Zhang, who works in the finance department at an auto-parts company in the southern city of Chongqing. “Buy them if you can.”
© Copyright 2016 Bloomberg News. All rights reserved.