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Market orthodoxy

12 May 2016 By Peter Thal Larsen

Regulators just can’t stop meddling in China’s stock market. Watchdogs have reportedly cut off fundraising in hot sectors, and may restrict overseas companies wishing to relist at home. Though their desire to avoid a repeat of last year’s bubble is understandable, bureaucratic intervention stunts China’s equity market.

Two and a half years after rulers pledged a “decisive” role for markets in the world’s second-largest economy, they remain reluctant to let supply and demand set the value of listed stocks. Last week, the China Securities Regulatory Commission said it was studying companies, currently listed overseas, which are pursuing so-called backdoor listings on the mainland. According to Caixin, the CSRC has also stopped listed firms from raising capital to invest in speculative industries like internet finance, video games and virtual reality.

The desire to prick bubbles before they inflate is forgivable. Memories of last year’s debt-fuelled stock market boom, bust and failed bailout are raw. Botching the response to the crash apparently cost the CSRC’s last boss his job. Besides, the retail investors who still hold the majority of tradeable equities are prone to blaming authorities for any losses.

In an attempt to restrict supply, the CSRC has reined in initial public offerings. So far this year regulators have permitted 43 new listings, raising just over $3 billion, according to Thomson Reuters. In the same period last year, they waved through 122 offerings raising $11.5 billion.

Not surprisingly, some of the hundreds of companies waiting for approval for an IPO have turned to already-listed groups to tap the market. Follow-on equity offerings in China have raised $19 billion this year – close to the $20 billion issued in the same period of 2015. Once-obscure stocks have become speculative darlings as investors try to guess which shell companies will become a vessel for groups seeking a listing.

By trying to rein in such speculation, however, the CSRC is effectively second-guessing market decisions about how best to allocate capital. This leads to poorly developed stock markets, which in turns leaves China overly dependent on debt. Just 4 percent of the new financing pumped into the economy in the first three months of the year was in the form of equity. That’s unlikely to change as long as regulators keep tinkering.



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