In 2014, China plans to resume IPOs in order to amp up its domestic stock market. Hundreds of companies have this golden opportunity, but success isn’t promised. Coming directly from Shanghai, Peter Sweeney, Reuters Senior Markets Correspondent, shares a few key points on challenges companies may face next year – challenges that could hinder absolute prosperity with this new free-for-all movement.
A Speculative Gamble?
Pete Sweeney, Reuters Senior Markets Correspondent, says: “This is a big hot topic right now; there’s a lot of things involved. They are some 800 companies that have been waiting for over a year to tap the markets for cash. It’s a key policy goal for Beijing to encourage that to happen because China’s trying to de-leverage the economy, and also it wants to get companies off the books at banks. Right now a lot of the problems that China’s having with debt is related to over dependence on bank lending, and stocks markets are a key new channel for companies to raise funds, but the problem has been that stock markets have been kind of considered speculative sort of gamble by a lot of Chinese investors.
“Also the stock markets have performed really badly. Since a peak in 2007, stocks are down some 60% depending on which index you look at. That’s not very good, Chinese stock markets have been really poor performers and there’s another problem that’s facing regulators right now which is that unlike Western markets, in China stock markets indices are driven overwhelmingly by small retail investors, just your average mom and pop investor moving small amounts of money around on a day-to-day basis. That’s very different from the more sophisticated hedge fund, investment fund-driven culture you have in more developed economies. It’s a problem and an opportunity. These people represent a massive amount of cash they have huge savings – a recent survey showed that maybe 57% of Chinese average investors keep their money in the bank and another 18% of that is in cash underneath the mattress.
“Unlocking that and putting that into stock markets is potentially a huge deal and it could be a huge benefit for Chinese firms trying to raise money. The problem of course is that these Chinese retail investors are very skeptical about stocks as an asset class in general compared to say housing which is produced three digit returns for almost everybody over the past decade, or, you know, fixed income products, wealth management products which are considered tacitly guaranteed by the government. So you’ve got to rebuild confidence in stocks in general, and to do that, you have to convince people, like the people in here, who are just investing on a day-to-day basis.
Supply and Demand
“The problem is these people are not generally excited about the resumption of IPOs, in fact they were more excited when IPO was frozen and this was something that people had publicly petitioned to happen. The idea being that if there’s a fixed amount of money in the stock market and more companies coming to ask for it, mathematically on the supply/demand curve, the price of everything goes down because there’s more supply and the same amount of demand.
“So we’re going to see what happens in January/February once these 800 firms start trying to list and trying to get the same amount of money. But the question on everybody’s mind is, is it going to be good on the market in the short run or is it going to provoke a crash.”
We won’t have to wonder much longer. The market will speak for itself pretty shortly.