In China, IPOs Defy the Stock Market Slump

China has the world's worst-performing major equity market this year and the best returns on initial public offerings. While the Shanghai Composite Index has fallen by 22 percent as of June 1—for the steepest drop among the 10 largest stock markets—IPOs have surged 29 percent on average during their first month of trading, data compiled by Bloomberg show. That's better than IPOs have fared in any other world market with at least five offerings this year.

The rally by newly listed mainland companies has made their shares almost twice as expensive relative to profits as the broader market, a sign to some, including KBC-Goldstate Fund Management and hedge fund Platinum Partners, that a bubble may be forming. "Most of the China IPOs are overvalued," said Larry Wan, Shanghai-based deputy chief investment officer at KBC-Goldstate, which oversees about $583 million. "It's difficult to believe they are going to be able to deliver the sort of exponential growth that the valuations imply."

Chinese companies have raised more than $25 billion through IPOs this year. That number may more than double after the sale of shares by Beijing-based Agricultural Bank of China, expected this summer. The nation's third-largest lender by assets will be seeking at least $30 billion in Shanghai and Hong Kong, according to the Beijing Times. That would be the world's biggest initial offering, exceeding the $22 billion deal by Industrial & Commercial Bank of China in 2006.

The rally by newly listed companies has been primarily fueled by individual investors, according to Andy Xie, an independent economist in Shanghai.

"Chinese investors have this traditional belief that you can't lose money buying new stocks," said Xie, formerly Morgan Stanley's chief economist for the Asia-Pacific region. "This is not sustainable. China's economy has big bubbles, so does the IPO market. Investors can't be fooled forever."

The bottom line: Chinese investors are shrugging off the European debt crisis and other concerns, trying to make big scores on companies going public.

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