The first batch of stocks under China’s new IPO registration system began trading today and saw massive buying interest from investors and some almost tripled.
Under the previous rules, on the trading debut, stocks could rise by only 40% and fall by 36%. Now, the country has come up with a new mechanism under which there would be no trading restrictions for the first five trading days post which the usual 10% circuit breaker would come into play.
While the new rules might lead to higher volatility, they would also support efficient price discovery.
China’s new IPO rules
Dencare Chongqing Oral Care was among the ten companies that went public today and the stock more than tripled on the listing.
To be sure, the company went public at a PE multiple of 36.8x which is a discount to the average industry PE of 51.6x. However, after the surge, the valuations are now at a premium to the wider industry.
Under the new IPO registration system in China, the regulators examine the companies based on the quality of information rather than the growth prospects.
Yi Huiman, the chairman of the China Securities Regulatory Commission said “The changes brought about by the IPO reform are all-round and fundamental, centred by information disclosure.”
Analysts see the new rules as a positive
Analysts are constructive on China’s new IPO registration system.
Liu Min, an analyst at Chasing Securities said, “The registration-based system will reduce direct interference from the government, and be helpful in boosting the efficiency of resource allocation.”
Min added, “It will increase support from the stock market to the economy by widening fundraising access for small and medium-sized companies and streamlining approval processes.”
China also framed new laws for overseas IPOs
Earlier this year, China also framed new laws for domestic companies looking to list overseas. The regulators would have the power to vet overseas IPOs on national security concerns.
The rules come after the Didi IPO debacle where China forced the ride-hailing company to delist months after the US listing.
China’s stock markets were weak today
Meanwhile, the IPOs which listed under the new domestic rules surged despite the broader market weakness.
Notably, a lot of funds turned overweight on China expecting a fast recovery in the world’s second-largest economy.
China has taken several decisions which show that the country is now warming up to the tech sector. It allowed the downloads of Didi apps, approved Ant Financial’s request to raise capital, and also announced overseas listing rules for domestic companies.
Many see Ma’s reappearance in China after spending almost a year abroad as a sign of China warming up to the tech sector.
As Stephen Roach, a senior fellow at Yale University told CNBC, “Jack just didn’t show up in Hangzhou because he was tired of traveling around. I think it was well orchestrated and fits with the government’s campaign to demonstrate that, you know, they are relaxing pressures on their private sectors and are welcoming the rest of the world.”
Recently, Apple CEO Tim Cook also visited China where he praised the country.
China expects GDP to rise 5% this year
Notably, China expects its GDP to rise “around 5%” in 2023. China’s GDP rose at an annualized pace of 3% in 2022 which was better than the 2.8% growth that analysts expected. The growth rate was however the second lowest since 1976 and the world’s second-largest economy fared poorly in only 2020 when it grew by a mere 2.2%.
China was officially targeting GDP growth of 5.5% in 2022. However, the target looked demanding at the very onset. As the year progressed it became amply clear that the country would not be able to meet the target.
China’s recovery has been slower than expected
Meanwhile, Citi believes that China’s economic recovery has been slower than expected. The country would release its first quarter GDP data next week which would provide insights into the health of the world’s second-largest economy.
That said, many still investors still have scars of the 2021 tech crackdown in China which eventually led to the forced delisting of Didi.
The Chinese economy has slowed down structurally and the days of high single-digit growth seem to be over. Also, several sectors of the Chinese economy especially the real estate sector are facing severe headwinds.
Tensions with the US, which is its largest trading partner, are not making things any easier for China. Many companies including Apple are contemplating diversifying their production away from the country. While there hasn’t been a mass exodus of foreign companies from China, many are now having second thoughts on over-reliance on one country for their sourcing needs.