The more companies launch IPOs in China, the better for the market. That’s how Ben Kwong, KGI Asia COO puts it.
“The bull run in China started one-and-a-half years ago, and it has reached such high levels that aroused the concerns of the regulators. Crazy cows that are running too fast die quickly, so they have to regulate the bull run to make it last longer. One way to do it is to add more supply in the market to avoid a situation where too much money is chasing too few stocks.”
In an interview with NexChange, Kwong pointed out that the bull run in China usually lasts one to two years, unlike in the U.S. where it could be as long as five to six years. This is because “most Chinese investors are very aggressive and they tend to extract too much money at a very short time.”
The China Securities Regulatory Commission has just given the green light to 28 firms to launch initial public offerings in Shanghai and Shenzhen, according to Reuters.
These companies will follow state-owned China National Nuclear Power, which this month raised 13.2 billion yuan ($2.13 billion) through its initial share sale in China, the biggest IPO in the mainland since 2011.
While IPOs trigger short-term volatility in the market as it saps funds away from other stocks, in the long run it will be beneficial to the overall health of the market, said Kwong.
“Increasing the supply of stocks in the market through IPOs will slowdown the pace of the bull run,” said Kwong. “The government will be happy to see a correction in the market.”
BlackRock also expects more companies to do an IPO given the attractive valuations in the market. In its most recent weekly Asian market views published on its website, BlackRock noted:
“The Chinese market has seen plenty of IPO activity, with more to come, as the recent bull market and triple digit price-to-earnings valuations make issuing equity an attractive way for companies to raise financing. Approximately 50-60 IPOs are coming to the market a month, with 700 more in the pipeline.”
BlackRock said while these IPOs will give investors an array of choices, the asset manager favors firms with longer-term growth potential versus cyclical companies.
Some pundits say the Chinese stock market is now in a correction territory after it plunged 13% last week, its worst weekly performance since the global financial crisis in 2008.
Kwong agreed, but preferred to use another term for “correction.” He said the recent rise earlier this month, which saw the Shanghai Composite Index peaking at seven-year highs, won’t be the last.
“Its now under consolidation after a strong rally. But there will be another rise in the next few months and the target is to test the most recent highs.”
Photo credit: Aaron Goodman via Flickr