Global markets should fear China’s imminent equity bubble burst
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Emerging Markets

Global markets should fear China’s imminent equity bubble burst

One year on from China’s stock market wobble, the country’s Securities Regulatory Commission’s warned this week against irresponsible share sales fearing further listings could imperil the future of its equity market.

Chinese equity investors have had something of a reality check over the last few months. The Shanghai Composite Index is down 18% since the start of January, and more than 30% off its October peak, and it is not just stockholders who are getting worried.

The China Securities Regulatory Commission, China’s stock market regulator, stepped in this week to warn companies against big share sales that could depress the market further, taking a highly unusual step designed to calm nervous investors.

 

“Refinancing by listed companies is one of the capital market's functions, but companies should take the timing, scale and market sentiment into account when planning new share issues. Companies should on no account maliciously seize money from the market,” the CSRC said in a statement on its website that was repeated by the state-controlled Xinhua news agency.

That was enough to reverse the slump in the Shanghai Index, which had lost 10% over the four previous sessions, and the message also reached Ping An and Shanghai Pudong Development Bank, which have both scaled back their fundraising plans.

Ping An, China's second biggest life insurer, had spooked the market with news of a plan to issue shares and convertible bonds worth up to Rmb120bn ($16.8bn). Pudong Bank had been targeting Rmb40bn ($5.6bn).

While the statement has smoothed over some short-term volatility, the CSRC’s intervention shows a real concern that the stock market may not be able to support the massive volumes of new issues that are being thrown at it.

This week’s blow-out Rmb22.25bn ($3.1bn) IPO from China Rail Construction Corp, with an orderbook 140 times oversubscribed, makes that argument look incredible, but the danger that the Chinese market could come off the tracks in 2008 is very real.

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