Yao Lina, an accountant in Shanghai, says the 43 percent opening-day gain for China’s first initial public offering in more than a year isn’t enough to bring her back to the $3.2 trillion equity market.
“If they jump a lot, that means bigger risks,” Yao, 34, who sold all her equity holdings in November, said on Jan. 17 as Neway Valve (Suzhou) Co. (603699) jumped in its Shanghai Stock Exchange debut. “And if they fall, that means shares are overpriced.”
Yao’s reticence toward Chinese stocks is being repeated across the country, a sign that the campaign by regulators to crack down on overvalued IPOs and improve corporate disclosures is failing to boost confidence among individual investors. The number of Chinese stock accounts containing funds shrank to a three-year low of 53.7 million on Jan. 17, a drop of 3.6 million from the June 2011 peak, data compiled by Bloomberg show.
The retreat, spurred by slowing economic growth and a shift toward higher-yielding wealth management products, is fueling losses in the Shanghai Composite Index (SHCOMP) that erased $571 billion of market value in the past four years and sent the gauge to a five-month low on Jan. 20. While Societe Generale SA says bearish sentiment is a buy signal, Asian Capital Holdings Ltd. and Calibre Asset Management Ltd. predict it will weigh on stocks in a market where individuals account for more than 80 percent of trading volume.
Neway Valve, the first of what PricewaterhouseCoopers LLP estimates will be $41 billion of Chinese IPOs this year, has tumbled 14 percent since the close on its first day of trading. Almost half of the companies that have gone public in China since June 2009 now trade below their IPO price, while the Shanghai Composite’s valuation is the lowest on record versus global equities, according to data compiled by Bloomberg.
“Stocks may be cheap enough for long-term investors to consider, but they need to have holding power,” said Norman Chan, the Hong Kong-based head of investment at Calibre Asset Management, which oversees about $115 million.
Liu Xi, a 36-year-old hotel marketing official in Shanghai who hasn’t made any money since she invested 90,000 yuan ($14,875) in the stock market two years ago, is losing patience.
“I feel sad and frustrated about stocks,” Liu said on Jan. 17. “Even if IPOs rise on the first day, you’ll need to keep an eye on the movement. Why should I bother to put money in a market I need to worry about every day?”
Liu invests in wealth management products offered by banks that advertise returns of about 6 percent, she said. The Shanghai Composite has declined 5.1 percent this year through yesterday, the biggest drop among benchmark equity gauges in 14 Asian markets tracked by Bloomberg. It rose 1.8 percent to 2,045.25 at 11 a.m. local time.
Individual investors don’t expect “large upside in the Chinese market and their investment horizons are short,” said Anthony Neoh, a visiting professor at the National University of Singapore who is part of the Chinese securities regulator’s international advisory body. “Retail sentiment may come back if there is a clearer message that the markets will be better regulated.”
Investments that have lured money from the stock market, including wealth management products, trusts and real estate, carry their own risks.
A troubled 3 billion-yuan trust product distributed by Industrial & Commercial Bank of China Ltd. that matures Jan. 31 has fueled speculation of looming defaults by similar products. Cities including Shanghai and Shenzhen (SZCOMP) have tightened local property policies since November to contain price increases.
When individual investors exit the stock market, it’s usually a buy signal because it leads to lower valuations, David Poh, the regional head of portfolio-management solutions at Societe Generale’s private bank, said by phone from Singapore on Jan. 17. The Shanghai Composite trades for 1.3 times net assets, a record 35 percent discount versus the MSCI All-Country World Index, data compiled by Bloomberg show.
Efforts by the China Securities Regulatory Commission to prevent overvalued IPOs may help protect investors against losses, Tai Hui, the chief market strategist for Asia at JPMorgan Asset Management, said in Singapore yesterday.
The CSRC said last week it started spot checks on IPO pricing with 13 underwriters and 44 institutional investors. The regulator said Jan. 12 it will suspend offerings by companies found to have disclosed information not contained in IPO prospectuses and other public releases.
Seven of the eight companies that started trading in Shenzhen yesterday surged at least 45 percent from their IPO prices, triggering trading halts under exchange rules designed to prevent excessive swings. Four of the companies closed lower today, while Anhui Yingliu Electromechanical Co. jumped 34 percent in its Shanghai debut.
Xu Nan, a 26-year-old construction worker in Harbin whose 10,000 yuan of stock investments have so far lost money, says he’s still keen to buy shares in IPOs.
“I am more optimistic than others, maybe because I haven’t participated in any IPOs before and would like to try,” Xu said from the northeastern city famous for its annual ice sculpture festival. “The point about investing is to find out what’s hot and get in there.”
The CSRC crackdown on IPO pricing may encourage investors to sell on the first day of trading to lock in gains, Dai Ming, a money manager at Hengsheng Hongding Asset Management Co., said by phone on Jan. 17.
Neway, a maker of industrial valves, had the highest turnover among companies on the Shanghai Stock Exchange in its debut, with more than 1.3 billion yuan of shares changing hands.
Forty percent of companies that went public between June 2009, after the end of a previous IPO freeze, and September 2012, are trading below their offer price, data compiled by Bloomberg show. That’s even after the stocks surged an average 35 percent on their debut.
“When the issue is launched in the market, it’s set at a peak,” Ronald Wan, chief China adviser at Asian Capital in Hong Kong, said by phone on Jan. 20. “If the situation doesn’t change, it’s bad for the IPO market.”
A phone call to the CSRC’s press office wasn’t answered and there was no response to faxed requests seeking comment.
Joyce Jin, who works at a bank in Shanghai, said China’s slowing economy is one reason she won’t participate in IPOs after her stock investments in 2008 lost more than half their value.
The nation’s factory output and investment-spending growth slowed last month, while economists surveyed by Bloomberg predict the world’s second-largest economy will expand 7.4 percent this year, the weakest pace since 1990. Chinese leaders, including President Xi Jinping, have signaled their willingness to sacrifice short-term growth to reduce the economy’s reliance on debt-fueled infrastructure spending and tackle pollution.
“I have given up investing in the stock market for a couple of years,” said Jin, 33, who owns three properties in China. “For us who want more stability, the macro economy doesn’t look too good.”
Yao, the accountant who sold her stock holdings two months ago, plans to use the proceeds to redecorate her apartment near the Lujiazui financial district in Shanghai, where new home prices have climbed 18 percent during the past year.
“The speculation on IPOs will probably be short-lived,” she said. “I am not positive on this market.”