By Jack Hu
China has overtaken Hong Kong as the top initial public offering (IPO) market. The number of listings in China’s stock exchanges has surged 303 per cent, with 246 companies raising up to US$18 billion in the first half of 2017.
Good news? Not according to Han Zhiguo, a renowned Chinese economist, who wrote a long post on popular social media platform Weibo slamming China Securities Regulatory Commission (CSRC) for its poor regulation of the market. Small investors, he warned, will be the ones suffering the consequences:
The economist pointed out that in the US the stock market has a transparent monitoring system that compels companies to disclose their business information, there are harsh penalties for business fraud, it operates in a free market and that market is currently on the rise.
China does not have an open and transparent monitoring system in place and the market is full of fraud. Moreover, investors’ decisions are not based on free market information but political speculation. Currently, the Chinese stock market is very fragile after a series of crashes in the past two years.
The 2015 stock crash wiped out trillions of yuan from the portfolios of small investors, who included tens of millions of ordinary workers, farmers, housewives and pensioners. At that time, price-to-earnings (PE) ratios for Chinese stocks averaged an astonishing 70, against a worldwide average of 18.5, and the value of the A-shares inside China grew to be nearly double the equivalent shares of the same companies on Hong Kong’s exchange.
However, the regulators have apparently not learned their lesson. Han alerted that the IPO listing frenzy is another huge trap for small investors:
The above post was shared about 9,900 times on Weibo with more than 3,400 comments.
Most of the comments echoed Han’s analysis and proposal for setting up an open and transparent market monitoring system, but some were sceptical given China’s current political environment. For example, two of the comments in the thread read:
Such a poor impression of China’s stock exchanges has been fed by a number of cases of business fraud and misconduct involving CSRC’s management.
For example, Yabaite, a listed building material company, was exposed by Chinese state television recently for faking overseas deals and cooking its books, but the cap fine imposed by CSRC was just RMB 600,000 — compare that with its RMB 7 billion market value.
Lv Yongxiang, the president of Yongda, a Shenzhen-listed electronic switch company, and his family members cashed out all their stocks of about RMB 6.8 billion in the bull market of 2015 and resigned from all company positions.
Feng Xiaoshu, a former member of the Public Offering Review Committee in CSRC, gained nearly RMB 250 million by investing RMB 3 million into a company just before its listing. Feng has been under investigation since April for insider trading.
Other senior officials of the commission including Assistant Chairman Zhang Yujun and Deputy Chairman Yao Gang have been investigated amid a financial anti-graft campaign following the 2015 stock market crash.
In response to Han’s criticism, four of finance newspapers — China Securities Journal, Shanghai Securities Journal, Securities Times and Securities Daily, which are designated by the CSRC for publishing its announcements and listing companies’ required disclosures — argued that CSRC should not slow down IPO listings as small- and medium-sized businesses need capital investment for further development.
Han fought back on Weibo, criticising the papers for protecting the financial sector’s interest rather than the public interest. This post was deleted soon after it appeared on highly censored Weibo. He urged his followers to copy his views and spread it via other social media outlets: