When shares slumped in PetroChina, Asia's most profitable
company, after its stellar debut in Shanghai, mainland listing
rules came under the spotlight.
Insiders said the fundamental problem is the rules governing
initial public offerings (IPOs), which seem to favor institutional
investors over individuals in the pricing and issuing of
shares.
As a result, many individual investors who fail to obtain an IPO
allotment must buy shares when trading begins. That rush for stocks
has on many occasions pushed prices to unsustainable levels.
The China Securities Regulatory Commission and the Shanghai
Stock Exchange at the end of last year assembled a group of
stockbrokers and insurance companies for a one-day discussion to
get their views on the issue in general and the poor performance of
PetroChina's A shares in particular.
Shares in PetroChina opened at 48.6 yuan on November 5, and slid
40 percent to 31 yuan within a month. The sharp fall of China's
largest stock also triggered a slide on the benchmark Shanghai
Composite Index.
The phenomenon is not unique to PetroChina. The share prices of
many other newly listed stocks have also nose-dived after initial
spurts.
"These records show that the current pricing system has flaws,
resulting in failure to establish a fair IPO price," said Gui
Haoming, an analyst at Shenyin Wanguo Securities.
"There are vested interests influencing the prices of IPOs,"
said Wu Feng, an analyst at TX Investment Consulting Co Ltd.
The current rules, which took effect in September 2006, give
three ways to subscribe to share issues: private placements to
strategic investors, private special subscription for institutional
investors, and open online subscription for individual investors.
Institutional investors that subscribe for IPOs can count on
getting an allotment in proportion to the size of the subscription,
while only a small portion of individual investors' subscriptions
are successful.
"The current issuing rules are not suitable in a bullish stock
market, which entices many individual investors to try to snap up
large quantities of IPO shares as soon as the company is listed,"
said Zhu Haibin, an analyst at Essence Securities.
Meanwhile, the large amounts of capital temporarily frozen in
IPO subscriptions are seen to have a negative impact on financial
market stability.
Liu Shiyu, deputy governor of the People's Bank of China, was
quoted as saying that the government should restructure the pricing
system in the financial market and review stock-issuing rules to
minimize the impact on interest rates and the government bond yield
curve.
Analysts said interest rate fluctuations have made it difficult
for central banks to carry out monetary policies when commercial
banks are faced with a sudden shortage of liquidity as it flows
from bank deposits to IPO subscriptions.
Roughly 200 billion yuan of banks' financial products focus on
IPO subscriptions, statistics show. The average annual IPO
subscription from institutional investors - including mutual funds,
State-owned firms, insurers and listed companies - amounts to
around 2 trillion yuan.
Experts have suggested the government set up a monitoring system
on pricing and adopt a market value or stock accounts-based
allotment system to issue shares.
The market value allotment system, abolished in 2006, was based
on the size of an investor's portfolio. For example, if an investor
holds 10,000 yuan worth of circulating stocks, they can subscribe
100 shares in an IPO.
The system protects the interests of individual investors and
dredges the large amounts of capital piled in the first-tier market
to the second-tier market, experts said.
But Liang Yufeng, director of research at Orient Securities,
said market value allocation, which was used to encourage investors
to enter the bearish market two years ago, isn't suitable for the
current bullish market that's overflowing with liquidity.
Analysts said the government can set the upper limits of
subscription amounts for each investor, or allot IPOs based on the
number of investor accounts.
They predicted the government would push forward regulatory
reforms, as recently stated by Shang Fulin, China Securities
Regulatory Commission chairman. "We will step up efforts to
cultivate and form sound market operation, and push forward
regulatory change and innovation, to ensure healthy development of
the capital market," said Shang.
(China Daily January 17, 2008)
