Business / Markets

A rocky restart to IPOs

(China Daily) Updated: 2014-01-07 07:45

Chinese shares nosedived to a five-month low on Monday, calling for effective regulatory measures to fix the languishing stock market. And the ongoing reform of initial public offerings (IPOs) to mend a market in which a regulator-guided pricing system failed to prevent consistently excessive offering prices is surely one of them.

While the regulatory authorities are doing their best to ensure a successful restart for IPOs as early as this week, they should not underestimate the worries of Chinese investors. On the domestic front, the one-third drop in the Shanghai Composite Index in the past four years forced many investors to reconsider their decision to invest in stocks when property prices are shooting through the roof despite repeated government warnings.

Globally, the 6.8 percent drop in the Shanghai benchmark index was enough to make it the worst performing market in Asia last year, when US shares were hitting record highs.

There must be many explanations for such a poor performance by the Chinese stock market, which has failed to mirror the overall robust growth of the world's second largest economy. But there is no reason for regulators to allow it to struggle while vowing to build it into a market that can allocate funds in the most efficient way. A better-functioning stock market is deemed essential to fulfill China's plan to let market forces play a more "decisive role" in economic reforms.

The regulatory authorities must be aware of some investors' concerns that a potential deluge of IPOs would bode ill for share prices. But they don't seem to know how the rapid build-up of local government-related debts - newly released figures put it at $3 trillion - might affect investors' confidence. Adding to the difficulties of a smooth relaunch of IPOs will be the ostensibly tight money supply at the turn of the year.

Admittedly, these concerns have little to do with the latest reform of IPOs that will allow investors to play a more responsible role in pricing. But they can also make the road to the resumption of IPOs bumpier than expected if the plunge in share prices is anything to go by.

Given these conditions, securities regulators should become more committed to the long-term health of the stock market. More importantly, they need to convince investors that they will take care of teething problems in the new IPO mechanism to honor their promise of providing better protection to investors. For instance, they can assure investors that they will control the pace and quality of new IPOs to avoid unnecessary volatility.

Hot Topics

Editor's Picks
...
...