Banking & Finance

Taking stock

And the world’s top IPO market in 2011 was…

Chinese IPOs raised $73 billion

For many company owners, going public is a once in a lifetime opportunity to raise cash. Which is why the underwriter is so important – a poor job by the sponsor reflects badly on the company being listed.

You can therefore imagine the disappointment felt by Zhejiang Daoming Optics and Chemical, which was getting ready for its listing in November. When the underwriter – Haitong Securities – sent out the IPO recommendation letter to investors, it used the wrong company name, and ended up recommending a firm that makes playing cards instead, reports the China Daily.

The banker responsible for the gaffe will probably blame overwork, since 2011 was another strong year for Chinese capital raising. Companies raised a total of $73 billion from IPOs in Shanghai, Shenzhen and Hong Kong, according to Dealogic. That’s around double the amount raised on the New York Stock Exchange and Nasdaq in the same period.

But, in fact, the capital raised in Hong Kong and mainland China was less than half of the amount raised in 2010. That’s partly because there were no mega deals comparable with Agricultural Bank of China’s 2010 IPO, which raised $22.1 billion on its own. Spectacular market volatility, especially in the second half of 2011, also caused several substantial IPOs to be pulled.

In December for example, brokerage Haitong Securities (no doubt they got their own recommendation letter right) and renewables company Guodian Technology both postponed deals that could have raised as much as $1.67 billion and $647 million respectively, reports FinanceAsia.

Paradoxically, Chinese bourses managed to maintain their IPO supremacy despite being some of the worst performing markets in the world last year. The SSE Composite Index in Shanghai was down 21.7% in 2011 and the Hang Seng Index in Hong Kong finished the year with a 20% loss. This was not just a response to the global market slump, investors also became worried about issues in the domestic economy – inflation, local government debt and standards of corporate governance.

Nor is it by any means certain that the markets will take a turn for the better this year. For the average Chinese investor, this is bad news. Leaving money in the bank is not an option because deposits currently offer negative real interest rates. An uncertain future for the property market means that homeowners cannot expect to enjoy leaping house prices as they have done in the past.

Wealth management products have also been disappointing. Out of the 109 products launched last year, 95% either failed to make a return or lost money, reports China Securities Journal. (Wealth management products are packaged by brokerages for their richer clients, usually targeting hot investment themes, but since they aren’t public they bear more resemblance to private placements or structured products than mutual funds.)

The best performing product managed an unspectacular 5.88% return, with the worst losing 36.4%. Not surprisingly, equity-backed variants suffered the worst: 56% of stock-based products posted losses greater than 20%.

With the prospects of traditional investments so bleak, it’s no wonder that investors have turned to less orthodox options. Illegal investment schemes, including private lending operations and fraudulent “get-rich-quick” schemes have been getting increasing media coverage.

Not that these lead to happy endings either: there was trouble in Wenzhou with private loans going bad last year (see WiC124) and the latest hotspot is Anyang, a city of five million people in Henan, where the authorities are cracking down on investment schemes after a major protest from locals claiming to have been defrauded.

A one-off? Likely not. “We’re actually not that different from other places,” warned an Anyang policeman, cited in the Financial Times.

“We’re all firecrackers, and Anyang just happened to explode first.” Watch this space…


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