Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Here's an equity investor's summary of the 16,500-word (in the English translation at least) work report delivered by Premier Li Keqiang on Saturday: Sorry, folks, those market reforms will have to wait. The good news is that initial public offerings of stocks already slated to happen this year are likely to get a boost. The downside is that Chinese companies were just denied the easiest way out of their unprecedented pile of debt.

The hint wasn't in what Li said, but in the things he didn't mention. As Bloomberg News noted, the premier didn't talk directly about plans to shift to a registration-based system for IPOs. Hence, a free market in which regulators rather than bureaucrats decide which companies get to go public and at what price won't be coming as quickly as initially thought.

That means that a much-needed deleveraging of China Inc. is going to have to wait. The delay could be dangerous. By the end of September, private corporation debt had hit 205.2 percent of GDP, compared with the already high 149.2 percent for the Group of 20 biggest nations. 

Maxed Out
Private non-financial company debt hit a record 205.2 percent of China's GDP on Sept. 30
Source: Bank for International Settlements

One way to reduce leverage would be for companies to add more equity to their balance sheets. That becomes more difficult when you can't sell stock. Chinese companies issued a record amount of shares and other securities that count as equity last year. That process is now on hold as China assesses what to do about its wild market. 

Deleveraging Paused
Chinese companies issued a record amount of securities that count as equity last year
Source: Bloomberg

Even after the jump in equity offerings, debt is still a vastly bigger source of funds. According to the Bank for International Settlements, Chinese private non-financial companies borrowed the equivalent of 11.2 trillion yuan ($1.7 trillion) last year through Sept. 30. Some of that would be offset if the IPO spigots were open. There are currently 1,717 equity deals pending in China, valued at more than 2.1 trillion yuan.

The pause may benefit existing equity investors as the threat of increased supply is curbed. IPOs that can get through the barrage of approvals currently required are likely to find more demand. That should continue a trend of Chinese IPOs rallying off the bat. In the past five years, 67 percent rose in their first month of trading, with dozens jumping fourfold in the first session after being listed.

Rising Tide
In the past five years, 67 percent of Chinese stock offerings gained in their first month of trading
Source: Bloomberg

The cost of the delay will be reduced market liquidity, narrowed options for investors and removal of a channel to alleviate corporate financial risk. In case Premier Li didn't get the memo, there's just too much debt in China and one of the safest ways to change that would be to allow companies to sell more stock.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net