China’s Treading IPO Trance
Chinese stocks with a 5 percent MSCI decline through mid-year were roused from their torpor as IPOs suspended for months resumed worth $90 billion as hundreds of companies awaited approval. Under revised rules daily price fluctuations cannot exceed 20 percent and underwriters will be responsible for placement and after-market support. The domestic supply comes as banks and brokers attempt their own capital-raising to meet prudential ratios, and headline transactions are pending abroad such as CITIC in Hong Kong and Alibaba in the US. The formal financial services providers intend to strengthen their position versus “shadow” intermediaries which have lost monthly share after a squeeze on interbank and wealth management activity. Trusts narrowly avoided default after the “Credit Equals Gold” recent rescue, but with an estimated RMB 5 trillion coming due this year, one-tenth real estate-related, the prospect continues to hang over the sector. The “entrusted loans” company to company channel reported non-payments in June, as they were up at double the pace of corporate bonds in Q1. According to S&P the latter amount outstanding pips the US at almost $15 trillion including the $3 trillion in local government funding platforms. Reuters puts external bond issuance at one-fifth the emerging market total and on-shore and offshore transactions combined at $170 billion through the first half. With land sales dropping as their main revenue source, cities and provinces won approval from Beijing for $65 billion in straightforward municipal bonds this year which will no longer be backed by the Finance Ministry. Fitch Ratings praised the move toward on balance sheet obligations with greater transparency but noted the transition would be rocky. On the all-important property front sales in 300 cities were down almost 50 percent on an annual basis according to the latest tracking, with prices off in half of the nationwide sample in May. Official data calculates unfinished projects with a value of 20 percent of GDP as developers struggled in the second quarter to raise over $5 billion in offshore debt. Their leverage is at records by traditional measures but many specialists contend that short-term cash and liquidity are the overriding ratios with larger players not at risk short of outright collapse.
Premier Li has pledged to extend 7.5 percent growth as he implemented a mini-stimulus infrastructure package that hiked spending 15 percent. PMI readings continued around 50 amid subdued 2.5 percent inflation and flat retail sales increases. Trade data was lackluster in May with imports off and exports ahead slightly as FDI was at a year and a half low. A Bloomberg investor survey predicted the overall near-term debt/GDP ratio at 250 percent as the IMF and World Bank have become more strident in urging fixes. Deposit insurance, interest rate liberalization, currency flexibility and fiscal decentralization were among the recommended priorities which have stalled along with the equity pipeline.
