Fast track to riches on the mainland's IPO gravy train
SCMP June 11 2007
Karl Marx may have been wrong in preaching that capitalism contained
the seeds of its own destruction. But the version of it flourishing
on the mainland now may well contain the seeds of destruction of the
bona fides of the regime. The seeds are being well fertilised by western
financial institutions, and watered by the global liquidity bonanza.
One reason why Beijing has not come down harder, and sooner, on the
stock market bubble, is that it fears a surge of urban unrest if enough
people lose enough money. But there is another, unspoken, reason for
its reluctance. It was hinted at ever so obliquely by the World Bank
recently, when it criticised the pricing of many initial public offerings
on the mainland (and by implication, some mainland companies which
have listed in Hong Kong).
Underpricing has led to huge losses in state revenue and corresponding
gains to those acquiring shares at, or before, the IPOs. The big gains
made by new issues have also given the impression that money is easy
to make in stock markets, thus attracting millions to rush to open
Some underpricing is normal. Companies being listed would rather get
a little less than market value rather than risk the ignominy of a
discount when trading begins. However, on the mainland, IPOs have become
by far the easiest way for party and government insiders to get rich
quickly without apparently breaking any laws. They get allocations
for the IPOs with loans from state banks.
A similar, if less dramatic, tendency has been present in Hong Kong
issues. Here, the major beneficiaries, other than the mainland insiders
and investment banks, have been local tycoons and their related companies.
They have received huge pre-IPO allotments, which create a shortage
of stock available for the public, a stampede for subscription forms
and ludicrous levels of oversubscription, leading to massive price
premiums when trading begins. Even if the insiders are locked in for
a period, they almost invariably end up with massive profits at the
expense of both outside investors and state revenues.
There are many officials still waiting their turn on this gravy train
who will be upset if government measures prick the stock bubble and
undermine investor belief in IPOs.
But one should not just blame the mainland. The underlying cause is
an international money and speculative glut. The Shanghai market is
just the most extreme.
Fitch, the ratings agency, has noted that instead of using derivatives
to offset risk, international banks have in fact been taking on more
risk themselves by selling risk protection to non-bank institutions.
Beijing's Blackstone deal makes matters worse by giving the biggest
private equity player a huge addition to its equity base which can
then be leveraged. The China connection may also give it even easier
access to borrowing and add to the respectability of leveraged private
equity, even while Blackstone itself is selling shares (but not votes)
But Blackstone did not create the money supply now sloshing around
the world, or the ultra-low interest rate environment on which their
industry thrives. This derives from the massive US current account
deficit, Japan's absurdly low interest rates and Beijing's refusal
to run interest-rate or currency policies reflective of its economic
For the mainland, a US$3 billion investment in Blackstone may be peanuts.
But it suggests that Beijing has inadequate awareness of the inter-relationship
of global bubbles, of which Shanghai's is now the most conspicuous.
Former US Federal Reserve chairman Alan Greenspan also seems myopic.
It may be fair for him to forecast that the Shanghai market will collapse
at some point. But one could say the same about the opaque derivative
and hedge-fund markets feeding the global boom.
It cannot last, but those mainland insiders are right to be impatient
to get their IPO feed before it's too late.
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