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Forged in froth

27 April 2015 By John Foley

China’s debts worry the world, so a recent rush towards more equity-raising by Chinese companies sounds like a good thing. If investors were more discerning, it would be.

When shares run up as rapidly as they have in Shanghai, Shenzhen and lately Hong Kong, skimming off the froth is the rational thing to do. China Eastern Airlines is one company that has spied an opportunity. It said on April 23 it would raise $2.4 billion by placing shares at a 25 percent discount to its last closing price in Shanghai. The shares promptly rose – widening the gap to 39 percent by midday on April 27. Investors’ pleasure at seeing companies raise growth funding evidently outweighs their worries about being diluted.

Others are dipping in too. Underwriting volumes for equity in mainland China increased 37 percent in March, according to Credit Suisse. Financial services companies loom large in the pipeline, including insurers Taikang and Sunshine, which are planning Hong Kong listings according to Chinese media. Regulators are also becoming more relaxed. The China Securities Regulatory Commission, which shut down initial public offerings altogether when markets looked weak, approved 25 listings last week, and has pledged to wave through two batches a month from now on.

More equity and less debt is just what China needs. Its non-financial companies had borrowed 125 percent of GDP by mid-2014, according to McKinsey. The equivalent figure for U.S. companies is 67 percent. Because of heavy-handed regulators and volatile markets, equity funding has provided just 3 percent of all corporate finance over the past 10 years, far behind loans, bonds and trade-related IOUs. In March the figure was a more encouraging 6 percent.

Issuers are wise to use the window while it remains open. China’s equity markets are pumped up less by fundamental factors than by the paucity of alternative investments, particularly as the property market sags. IPOs are a particular magnet for equity mania. Laobaixing Pharmacy is 74 percent above its prior-week float price in Shanghai; Shenzhen Ellassay Fashion is 92 percent up on its recent debut. Investors will be the ones left with losses if exuberant valuations fall. But at least smart companies will have more healthy balance sheets to show for it.


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