Chinese initial public offerings, like 17th-century Dutch tulips or dotcom stocks at the start of this decade, are the stuff of bubbles. The modern history of Chinese capitalism is filled with images of retail punters queuing around the block to subscribe to shares – or, at the Shenzhen stock exchange in the early 1990s, even being kept in line with cattle prods. But subsequent one-day pops that accorded companies with sketchy business strategies three-digit price/earnings multiples were, by definition, good-time phenomena. When the market faltered, regulators pulled down the shutters on new issues.
Now the end of the latest moratorium on domestic IPOs, which began last September, appears to be in sight. New draft rules aimed at improving the mechanics of IPOs are under consultation until June 5th, presumably with a view to re-starting the process thereafter. Certainly the good times appear to be back. China's supposed “V-shaped” recovery is the talk of the world, and the Shanghai composite index is up 42 per cent year to date.
Even if you believe this rally in Chinese equities is more convincing than elsewhere, tweaking the IPO rules now is brave. In the past, the popularity of IPOs has been precisely due to their structural constraints and mispricing. Improve the latter, as the draft rules envisage, and IPO pops will be erased. In 2007, during their first day of trading, shares rose by an average 150 per cent, according to Dealogic, and 90 per cent last year. An end to such ramping will chase out most retail punters: roughly half of all IPO shares, or 70 per cent of those allotted to retail, are sold on day one, according to brokers CLSA. Other proposed changes, which in effect reduce the size of institutional applications, will further remove liquidity. Still, if the reforms make popular capitalism a touch less popular in China, but more efficient, that is to be welcomed.