singapore hotel: 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 (SHCOMP) 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. (600718) 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.”

To contact the reporter on this story:

Weiyi Lim in Singapore at

wlim26@bloomberg.net

To contact the editor responsible for this story:
Michael Patterson at

mpatterson10@bloomberg.net

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