China Tops IPO Market, But Fear Persists for Small Investors

China has overtaken Hong Kong as the top initial public offering market. The number of listings in China’s stock exchanges has surged 303%, with 246 companies raising up to $18 billion in the first half of 2017.

Good news? Not according to Han Zhiguo, a renowned Chinese economist, who wrote a long post on popular social media platform Weibo slamming China Securities Regulatory Commission for its poor regulation of the market. Small investors, he warned, will be the ones suffering the consequences, HKFP reported.

China Securities Regulatory Commission has gone too far on IPOs: The US stock market adopts a registered system for IPOs with 150 IPO listings last year. China adopts an approval system with 500 listings in the same period.

As an open market, the IPO funding from US equities account for 23.2% of the global funding in the first half of the year, the second largest, while the IPO funding from Chinese equities, a closed market, accounts for 28.8% of the global funding, climbing to number one.

The economist pointed out that in the US the stock market has a transparent monitoring system that compels companies to disclose their business information, there are harsh penalties for business fraud, it operates in a free market and that market is currently on the rise.

China does not have an open and transparent monitoring system in place and the market is full of fraud. Moreover, investors’ decisions are not based on free market information but political speculation. Currently, the Chinese stock market is very fragile after a series of crashes in the past two years.

The 2015 stock crash wiped out trillions of yuan from the portfolios of small investors, who included tens of millions of ordinary workers, farmers, housewives and pensioners. At that time, price-to-earnings ratios for Chinese stocks averaged an astonishing 70, against a worldwide average of 18.5, and the value of the A-shares inside China grew to be nearly double the equivalent shares of the same companies on Hong Kong’s exchange.

However, the regulators have apparently not learned their lesson. Han alerted that the IPO listing frenzy is another huge trap for small investors:

The surge of IPOs without a regulatory system that punishes business fraud, de-lists the poorly performing companies and protects investors’ rights has filled the market with garbage, and expanding the garbage market would create a huge “quake lake” that eventually buries everything and crashes the market as well as the small investors. In the first quarter of 2017, 34 newly listed companies have recorded deficits in their businesses and 25% of the newly listed stocks have seen a decline in their business performance. It reflects the scale of fraud in IPOs.