IPOs: China’s IPO Freeze Misguided, Should End Quickly
Bottom line: China’s new IPO freeze to support its tumbling stock markets is ultimately a bad idea, signaling that Beijing will intervene in its financial markets to rescue irresponsible investors.
After several days of rumors, China’s securities regulator formally announced a temporary suspension of all IPOs over the weekend in a bid to halt a slide that has seen the main Shanghai index tumble nearly 30 percent over the past month. While such a step is understandable and may even help to calm the markets, it is ultimately misguided and should be allowed to quickly expire for a number of reasons.
A long-term freeze will hinder China’s drive to internationalize its markets, since it signifies that Beijing won’t let market forces prevail and instead will step in to rescue investors every time they spend their money irresponsibly. Such a long-term suspension would also create uncertainty for the many private firms that are some of China’s most dynamic companies, potentially cutting off a vital funding source just when they need it to fuel their rapid growth.
Allowing the markets to fall further would certainly cause pain for many investors, especially those who entered the stock market well after it began its meteoric rise late last year. But experience is often the best teacher, and allowing these investors to suffer losses could be the best way to prevent similar irresponsible behavior in the future and bring more market stability.
China’s stock markets have been on a roller coaster ride over the last year, starting with a rally that began last November when the central bank began cutting interest rates to bolster China’s slowing economy. That rally saw the main Shanghai composite index double at its peak in early June.
But the rally has come to an abrupt end, with the index dropping about 27 percent over the last 4 weeks. Some reports have pointed out that almost $3 trillion in market value has been wiped out in the sell-off. But far more value was also created in the earlier rally, despite any major change in the outlook for China’s corporate sector.
In response to the sell-off, the People’s Bank of China took the unusual step of lowering interest rates and banks’ reserve requirement ratios a week ago to boost market sentiment. The government has also taken other steps to boost confidence and liquidity, including this latest halt to new IPOs.
Rapid Decision
That freeze came together quite rapidly, and followed an announcement by the China Securities Regulatory Commission (CSRC) that it would slow the number of new listings. (English article; Chinese article) Such IPOs can put downward pressure on the market because they draw money away from trading in already-listed companies. Some 28 companies preparing for IPOs issued their own statements saying they would temporarily halt their plans due to market volatility.
This latest freeze is consistent with a pattern that has seen the CSRC halt new IPOs at times of weakness, including the latest freeze that began in late 2012 and lasted through all of 2013. It’s unclear if the latest freeze will achieve its goal of helping to support the markets. But regardless of that, it ultimately sends the wrong signal on a number of fronts.
Most importantly, the freeze tells speculators that Beijing will try to rescue them whenever they invest irresponsibly. It also sends a troublesome signal to young, private companies that genuinely need money to finance their growth and were planning to get such funds via public listings. Most such companies previously listed in Hong Kong and New York due to tough conditions in China’s own system. Many were considering returning home to China during the earlier stock market rally as the regulator relaxed some of those restrictions, though this IPO freeze could cause many to now reconsider that strategy.
Such a freeze will also hurt China’s drive to internationalize its markets, telling the world that Beijing will intervene whenever it feels the need instead of letting market forces prevail. Such market forces already do a far better job of regulating IPO activity in the west, since companies typically don’t list shares when investor sentiment is weak and usually wait until conditions improve.
Having declared the latest freeze, it’s already too late for Beijing to back away from this drastic step during the current stock market sell-off. But CSRC should seriously consider a quick end to this latest freeze in a matter of weeks or even days, allowing the market to run its course. That will send the strongest signal of all to everyone that market forces will drive China’s financial markets, and anyone who wants to participate will need to understand those forces before they participate.
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