The world’s biggest initial public offering market is not healthy

Companies have secured more than US$25bil (RM113.2bil) across over 100 deals in mainland China year-to-date. — Bloomberg

CHINA can claim victory over the United States in one area. It is now dominating the global initial public offering (IPO) market.

The number of US IPOs has plunged this year, as Wall Street grapples with a regional bank crisis and a debt ceiling standoff in Washington.

Meanwhile, companies have secured more than US$25bil (RM113.2bil) across over 100 deals in mainland China year-to-date.

The new winner

After the US special-purpose acquisition company or SPAC burst, China now dominates the world’s IPO market. Businesses sanctioned by the United States became market darlings.

Hong Kong-listed China Mobile Ltd, for instance, morphed into the country’s most valuable company last month after a 56 billion yuan (US$8bil or RM36.2bil) offering in Shanghai in late 2021.

In recent years, Beijing has implemented a slew of reforms to make it easier for innovative manufacturers to go public.

In 2019, the government launched a new Nasdaq-style tech board in Shanghai, ambitiously calling it the STAR market.

Earlier this year, the securities watchdog rolled out a registration-based listing mechanism to all domestic stock exchanges.

At first glance, the outcome is impressive. Since 2019, close to 900 industrial and tech startups have gone public, raising more than US$130bil (RM588.4bil).

Manufacturing firms now account for over half of the mainland’s market cap and for 60% to 70% of its trading volume.

Industrial startups had raised US$82bil (RM371bil) since 2019.

This is a welcome development, especially when the United States is escalating its year-long economic campaign, moving from export restrictions to possible investment curbs. China needs a healthy place where startups can raise cash.

On the other hand, the fast and furious influx of new IPOs is also changing the nature of the country’s US$10.6 trillion (RM47.9 trillion) stock market.

With so many small and highly specialised firms emerging, asset managers do not have enough resources to do proper due diligence.

An equity market that was finally making progress with institutional investors is once again dominated by retail traders.

Among the 1,500-plus firms that have gone public since the launch of the STAR board four years ago, less than 60% have analyst coverage, according to data compiled by Bloomberg.

About 70% of mutual fund holdings still reside with the so-called main board, dominated by financials and state-owned enterprises. STAR companies get only about 9% of money managers’ asset allocations.

This opens the door to speculative trades fuelled by social media frenzy.

Consider CloudWalk Technology Co, which the United States blacklisted in late 2021 for being “part of the Chinese military-industrial complex”.

In May 2022, the face-recognition technology provider raised a huge sum on STAR, with one-third of its IPO shares purchased by state-backed strategic investors including the Shanghai government.

Trading in CloudWalk has been brisk this year, but not because of its surveillance business. The company was hyped as one of the “artificial intelligence (AI) four little dragons,” even though it hardly generates any revenue from this field.

Its stock gained 141%, despite a 79% tumble in first-quarter sales.

Wild ride

CloudWalk certainly did its part to fuel the frenzy. On April 26, it announced a private placement plan to raise 3.6 billion yuan (RM2.3bil) – more than twice the amount of its IPO proceeds – that will go toward AI research.

On May 8, it said a new AI-based operation will be launched this month, to be used in smart finance and transportation.

There is very little sell-side research on this US$3.9bil (RM17.7bil) market-cap company.

In a retail-driven market, a company does not have to use IPO proceeds for their intended purposes. And meme-stock pickers may not even mind, as long as the management talks up the hottest trends.

President Xi Jinping likes to tell his comrades to retain their “original intent” and not forget why the Communist Party was established in the first place, enforcing this mandate with harsh anti-corruption probes.

But how many companies that have gone public in recent years are doing what they had promised to do? China’s sizzling IPO market is not exactly healthy. — Bloomberg

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. The views expressed here are the writer’s own.

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