Markets

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

China is counting on heady valuations and its power as the gatekeeper to get tech stars like Ant Financial to go public at home rather than in New York or Hong Kong. Listing candidates should be wary -- no matter how much it's reformed, the domestic market is full of fickle investors and regulators.

China Securities Regulatory Commission Chairman Liu Shiyu said this weekend that the watchdog will speed up approvals of IPO hopefuls sitting in a multi-year queue that exceeded 600 companies last month. According to Reuters, the CSRC will consider a shortcut for top tech firms, among them Ant Financial and Zhong An Online Property & Casualty Insurance Co., both Alibaba Group Holding Ltd. affiliates, and Qihoo 360 Technology Co.

The CSRC's aim is to beat Hong Kong, home to Tencent Holdings Ltd., and the U.S., where Baidu Inc. trades and Alibaba had its world-record $25 billion float in 2014.

Heady Gains
Chinese IPOs in the last 12 months have all soared in their first month of trading, with the smaller floats outperforming bigger listings
Source: Bloomberg

Given that the CSRC must approve any listing by a Chinese company, onshore or offshore, the government has might on its side. Many companies, like Qihoo 360 (which delisted from New York last year) and Dalian Wanda Commercial Properties Co. (a Hong Kong departure), have made no secret of their desire to tap valuations around three times as high as they can get outside China. Forced underpricing of IPOs means most listings reach the 44 percent limit-up ceiling on stocks, no matter how the underlying market is doing.

In fact, new listings last year rose an average 430 percent in their first month of trading, the biggest gain since at least 1999, according to data compiled by Bloomberg, even as the Shanghai Composite Index fell 12 percent.

But China's stock-market boom and bust in 2015 showed the danger of getting caught up in the mainland IPO craze. The market is dominated by retail investors, not a very steadfast bunch. They'll buy into a star company but are just as quick to desert those having a tough time, no matter what the fundamentals say.

Nor are the regulators entirely dependable. After the 2015 reversal, the government engineered a revival by, among other measures, halting trading in many companies and suspending IPO approvals. China's regulators have blocked issuance several times in recent years to control the supply of stock.

Top all this off with a history of relatively small IPOs, and the environment isn't ideal. The biggest domestic offering by a Chinese company was the $10 billion Shanghai leg of Agricultural Bank of China Ltd.'s $22.1 billion float in 2010. The rest was in Hong Kong. In the last five years, no IPO was bigger than the $4.85 billion float of Guotai Junan Securities Co. at the height of the 2015 boom.

Ant Financial was valued at $75 billion by CLSA Ltd., suggesting a multibillion-dollar IPO.

Small Isn't Beautiful
China's biggest IPO in the last five years was the May 2015, $4.85 billion Shanghai listing by Guotai Junan
Source: Bloomberg

While institutional participation has grown, and Beijing is considering allowing foreign firms to increase their stakes in Chinese investment-banking ventures, this market is still largely domestic. Foreign investors mainly buy Chinese stocks through quotas, and while the Hong Kong-Shenzhen and Hong Kong-Shanghai Connect programs increased inflows into China, such buying has been weak. Those trading pipelines also exclude buying into IPOs. 

Efforts to speed up companies' access to capital deserve praise, as does a shift toward new-economy enterprises and away from the state firms that dominate the market. But China is still mostly closed to big overseas investors, and listing candidates may find that domestic shareholders' love fades quickly.

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

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net