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May 19, 2006

China resumes IPO approvals


May 19, 2006

SHANGHAI: China ended a year-long ban on initial public offerings (IPOs) on Thursday, with the resumption of official share sales on its recovering stock markets effective immediately.

“The new IPO management measures were approved,” the China Securities Regulatory Commission (CSRC) said in a statement on its website.

“The rules take effect from May 18th, 2006.” IPOs were suspended in April last year as part of a plan to overhaul state enterprise ownership by selling down the government’s holdings in listed companies.

The aim of the sale, which initially jolted investors scared about the impact on liquidity, was to remove a massive overhang of state-owned stock which everyone knew had to be disposed of if the markets were to work in a more conventional and profitable fashion.

At the time, the state-owned, non-tradable shares in listed companies accounted for about two thirds of the market’s capitalisation but since then these shares have been progressively disposed of.

At the same time, after years of struggling in the doldrums, the Chinese markets have finally gained some traction over the past several months on the back of the government’s reform drive and this helped mute the impact of the news on Thursday.

Beijing promised to reinstate IPOs and additional share sales once 60 per cent of the listed companies had completed the state-share reform, a process which the authorities say is now 70 to 80 per cent done.

The news did put some pressure on stocks on worries that new IPOs would impact liquidity and drag stock prices lower but the markets held up relatively well on a day of very sharp losses in the region.

The Shanghai A-share Index shed 7.97 points or 0.47 per cent to 1,698.24 on turnover of 35.31 billion yuan ($4.41 billion) while the benchmark Shanghai Composite Index, which covers both A- and B-shares, fell 7.87 points or 0.48 per cent at 1,617.28.

For some, the

developement will inevitably undercut prices even as it opens up the bourse to more companies, thereby encouraging the development of China’s capital markets. “The IPO resumption will certainly have a long-term negative impact on stock prices as the P/E (price/earnings) ratios of the new issues are expected to be lower than those of current listed peers, which will drag down the overall market P/E ratios,” said Wang Xiaoming, an analyst at Xiangcai Securities.

Wang Mingzhi, a market analyst for GF Securities in Shanghai said the move could give investors better options in picking stocks but was unlikely to increase transparency in the market, especially over the movements of large institutional investors.

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