Chinese Small-Cap Stocks Fall the Most on Record on IPOs

China’s stocks fell, with a gauge of smaller companies posting the biggest drop on record, amid concern the government’s plan to restart initial public offerings will divert funds from existing equities.

The ChiNext Index of companies with a median market value of $1 billion sank 8.3 percent to 1,253.93 at the close, paring this year’s gain to 76 percent, as technology shares plunged. The Shanghai Composite Index slid 0.6 percent, trimming a loss of as much as 2.2 percent after data showed manufacturing topped estimates in November while PetroChina Co. and China Petroleum & Chemical Corp. rallied in the last 15 minutes of trading.

China’s securities regulator, which has banned IPOs for more than a year to reduce fraud and prevent a flood of supply from dragging down the market, said on Nov. 30 that 50 companies will be ready for new share sales by the end of January. Policy makers are lifting the ban amid a 12 percent rally in the Shanghai Composite from this year’s low in June, signs of a pickup in economic growth and pledges by the ruling Communist Party to increase the role of markets.

“The IPO plan is dragging stocks down, especially the small-cap shares,” said Xu Shengjun, an analyst at Jianghai Securities Co. “With new stocks coming that are going to be much cheaper and more attractive, it’s ridiculous to want to buy the expensive small-caps.”

Valuation Premium

The ChiNext trades at 31 times projected earnings for the next 12 months, while the Shanghai Composite is valued at 8.7 times and the Hang Seng China Enterprises Index has a multiple of 7.9, according to data compiled by Bloomberg. The CSI 300 Index lost 0.8 percent today, while the Hang Seng China index climbed 0.8 percent.

Software maker Neusoft Corp. declined 9.2 percent as a gauge of technology companies dropped the most among industry groups. Leshi Internet Information & Technology Co. retreated the most in more than a month. Suning Commerce Group led declines for consumer companies, slumping 10 percent.

China, the world’s largest IPO market in 2010, with a record $71 billion raised, hasn’t had an initial public offering since October 2012 as the CSRC cracked down on fraud and misconduct among advisers and companies. Communist Party leaders pledged last month to change the system as part of a package of reforms to allow markets to play a “decisive” role in setting prices and allocating resources.

Cash Needs

There are more than 760 companies in the queue for approval and it will take about a year to complete an audit of all the applications, the CSRC said.

“Restarting the IPO market is really following this mantra,” said Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong. “But doing it at a time when liquidity is tight makes it difficult to interpret this as good news and it suggests that Chinese companies really need an injection of cash.”

The CSRC also proposed drafting rules for a trial program to allow companies to sell preferred stock, based on guidance issued Nov. 30 by the State Council. Banks will be able to include preference shares in calculations of Tier-1 capital, giving them a new financing avenue to meet requirements for risk buffers, while helping reduce corporate debt levels, CSRC spokesman Deng Ge said in a separate statement.

Goldman Sachs Group Inc. said financial companies such as banks and brokerages will benefit from IPO reform.

Industrial & Commercial Bank of China Ltd. led a rally for lenders, adding 1.8 percent to 3.87 yuan. Agricultural Bank of China Ltd. rose 1.9 percent to 2.67 yuan. Citic Securities Co., the biggest-listed brokerage, jumped 5.1 percent to 13.56 yuan. Haitong Securities Co., the second largest, advanced 5.5 percent to 12.41 yuan.

Manufacturing Growth

PetroChina, the nation’s biggest oil company, jumped 4.6 percent to 8.27 yuan, erasing an earlier loss of 1 percent. China Petroleum, known as Sinopec, climbed 4.8 percent.

“There are unknown funds supporting the market,” said Zhang Gang, a strategist at Central China Securities in Shanghai, saying he can’t identify the funds. “These gains are temporary because the blue-chips were used to support the market and to ease the panicky mood but the overall fundamentals haven’t changed.”

A phone call to Central Huijin Investment Ltd., a unit of nation’s sovereign wealth fund, went unanswered today.

Chinese manufacturing growth indicated the nation’s economic recovery is sustaining momentum amid government efforts to rein in credit growth.

The Purchasing Managers’ Index was 51.4, the National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday. That’s the same reading as October, which was an 18-month high, and exceeded 24 out of 26 estimates in a Bloomberg News survey. A separate gauge from HSBC Holdings Plc and Markit Economics was 50.8, topping all 13 analysts’ projections. A number above 50 signals expansion.

Selling Pressure

China’s borrowing costs are climbing at the fastest pace since late 2010 and Bank of America Corp. says that’s making stocks vulnerable, just as it did back then.

The benchmark 10-year yield jumped 37 basis points this quarter and 48 basis points in the three months through September, the biggest increases since a 57 basis point gain in the final three months of 2010, a ChinaBond gauge shows. Shares are near the most expensive level relative to corporate bonds since February, according to data compiled by Bloomberg.

“China’s stocks may come under selling pressure within weeks just as surging borrowing costs preceded tumbling markets in 2010-2011,” David Cui, a Hong Kong-based strategist at Bank of America, said in a Nov. 26 e-mail interview. The crackdown on lending is “different from a tightening in response to strong economic growth, which is often a positive sign for the equity market in the early part of the cycle.”

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