China has captured a dominant share of the global market for initial public offerings, thanks to its economic dynamism. And it looks to be far from slowing down. Many analysts believe that the best is yet to come.
Chinese IPOs should continue to account for a large proportion of the global total, contends Jing Ulrich, managing director and chairman of China equities and commodities business at JPMorgan Chase & Co. We expect demand on the part of both domestic and international investors for exposure to Chinas economic recovery to remain healthy.
Paul Schulte, Nomura Securities Hong Kongbased chief Asia strategist, says China is going through a phase of development marked by powerful surges of credit and stock market capitalization. China enters this growth phase with the largest absolute pool of household savings [$3 trillion] and the largest savings as a percentage of gross domestic product [55 percent] ever recorded, he notes.
The combination of a robust economic recovery and flush liquidity allowed 159 Chinese companies to raise a total of $61.2 billion through IPOs on the Shanghai, Shenzhen and Hong Kong stock exchanges in 2009, according to data provider Dealogic. Those companies accounted for one quarter of all IPOs worldwide last year, and nearly half of the $125.5 billion raised globally.
Chinese IPOs have been as abundant and as varied as dim sum. Last July, when most global markets were in the doldrums, China State Construction Engineering Corp. raised 50 billion yuan ($7.3 billion) on the Shanghai Stock Exchange. In December giant China Shipbuilding Co. raised 14.7 billion yuan in Shanghai, and China CNR Corp., a major train maker, raised 13.9 billion yuan.
Most mainland IPOs involve state-owned enterprises; private companies prefer to list in Hong Kong, says Christine Chang, joint managing partner of law firm Maples and Calder in Hong Kong. Of the 62 companies listed in Hong Kong last year, 45 were China-domiciled, according to Dealogic. The 13 Hong Kongbased companies that listed derived a major portion of their revenues from China.
Hong Kong is facing tougher competition for Chinese listings, though. From its October 30 launch through the end of 2009, Shenzhens ChiNext small-cap stock exchange helped 42 private companies raise $3.6 billion. And, as Chang points out, a new trend among the one million or so Taiwanese entrepreneurs running companies in China is to list on the Taipei Stock Exchange.
Companies from China, Hong Kong and Taiwan are increasingly likely to seek dual or even triple listings on the Shanghai, Hong Kong and Taipei stock exchanges, says Li Jiange, chairman of investment bank China International Capital Corp. We consider these domestic exchanges, he tells Institutional Investor. In a few years time, he adds, Beijing may let foreign companies list on Chinese exchanges.
Chinas IPO boom has caused some concern among regulators about a possible bubble. In December the China Insurance Regulatory Commission announced new rules to curb insurers investments in stocks and prevent them from buying issues on ChiNext. Still, the China Securities Regulatory Commission is pressing ahead with liberalization. In January it announced formal approval of stock index futures trading, margin trading and short-selling. Those products are expected to be introduced within a few months.
Erwin Sanft, head of China and Hong Kong equities at BNP Paribas Securities (Asia), says the capitalization of Chinese stocks, both mainland- and overseas-listed, totaled $5.6 trillion at the end of October, more than the markets of Brazil, India and Russia combined and trailing only those of the U.K. ($7.5 trillion) and the U.S. ($19.9 trillion). Abundant liquidity, strong economic growth and financial liberalization should enable Chinese stocks to outperform developed markets in the coming decade, and could cause market cap to triple.
The last ten years saw China becoming the largest emerging market, Sanft wrote in a recent report. The next decade will see the emergence of the China asset class.