An investor at a securities brokerage in Haikou, Hainan province. A total of 176.1 billion yuan ($28.5 billion) worth of shares will become available on the market this month, according to reports. Experts say it will likely dilute share prices. [Photo/Provided to China Daily]

Flood of IPOs from capital-thirsty firms could further deflate market

Having dropped 4 percent since the start of the year, the Chinese stock market has won the label as one of the world's worst performers because of underlying macroeconomic reasons as well as market technicalities, analysts say.

They report that prevailing investor concerns over a more restrictive monetary policy plus a slower-than-expected economic recovery are now weighing heavily on the minds of many investors.

In addition, analysts remain worried that an expected flood of new IPOs issued by companies thirsting for capital will further depress prices.

Then there is the specter of the periodic release to the market of unlocked shares from listed companies.

Under China's market rules, major shareholders of non-tradable stocks are subject to one or two years of lock-up, after which time they are permitted to trade the shares.

On the macroeconomic front, China's official purchasing managers' index fell to 50.6 in April from an 11-month high in March of 50.9.

Although staying above the watershed mark of 50 - which separates expansion from contraction - some investors are concerned the lower-than-expected PMI indicates a weaker-than-expected economic recovery and are taking a bearish outlook.

However, some investors are viewing the economic data in a bullish light.

"The latest meeting of the CPC's top decision-making body highlighted the mission was to stabilize and hold the economic growth momentum, which indicates the authority's priority for the next stage may be to push economy growth, instead of risk control," according to a recent report from CITIC Securities.

A loosening attitude may outweigh tightening measures and lift share prices in sectors such as banking, real estate, home appliances, automobiles, and electricity power, it added.

The Standing Committee of the Political Bureau of the CPC Central Committee held a meeting last week on the country's economic situation amid the slowdown.

A statement released after the meeting said China needs to cement its domestic economic growth momentum and guard against potential risks in financial sectors.

However, a more obvious and direct threat to market performance could lie in the expected over-supply of shares.

"The refinancing of listed companies and the approaching new round of IPOs are draining capital from the market," said Li Daxiao, head of the research department at Yingda Securities.

A total of 253 listed companies had raised about 470 billion yuan ($75.8 billion) since the start of the year through issuing new shares, share allotments and bond issues, a 36 percent increase on the same period last year, according to the Chongqing Economic Times.

A total of 176.1 billion yuan worth of shares will be freed after the expiry of lock-up periods and become available for sale on the market this month, based on last Friday's closing prices, according to the paper. The volume marked a 66.66 percent growth from April.

Zhou Ming, an analyst with Everbright Securities, said the large volume of unlocked shares "is very likely to dilute share prices and cause an imbalance of buyers and sellers in the market", especially notable for the board of the Growth Enterprise Market.

"The board saw big growth in the past months, and initial shareholders are more willing to move out of stocks for cash under these circumstances," said Zhou.

What's more, jitters have increased as reports about a resumption of IPOs continue.

The China Securities Regulatory Commission paused IPO permission in late 2012 and since then has been carrying out stringent checks to fight against finance fraud and curb fears of an oversupply of new shares.

However, news reports suggest there are still more than 700 companies queuing to go public in the mainland.

xieyu@chinadaily.com.cn