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| Mainland Chinese stock exchanges are experiencing a rush of initial public offerings. |
| Source: iStock via Getty Images |
Mainland China is on course to become the biggest market for equity fund raising via initial public offerings in 2022, helped by an accommodative monetary policy and regulatory changes.
Aggregate proceeds raised in Shanghai and Shenzhen totaled US$48.4 billion in the first half of the year, surpassing the US$47.5 billion raised on the two biggest mainland China exchanges in 2021, according to data from consulting firm EY.
The STAR board, China's equivalent of Nasdaq, accounted for more than a third of the money raised on mainland Chinese exchanges, a 63% year-over-year increase.
"We expect more companies, including those that missed IPO windows in the first half, to resume listing plans in hopes of more favorable valuations," said Paul Go, global IPO leader at consulting firm EY. Many overseas-listed Chinese firms are either seeking a secondary listing or a change of primary listing as a growing list of companies face delisting in the U.S. for Beijing's refusal to let American officials review their audits. The U.S. Securities and Exchange Commission has nearly 200 companies on its watch list for potential delisting, including e-commerce giant Alibaba Group Holding Ltd.
China will also extend an easier registration-based system for IPO listings to more stock exchanges after Shanghai's STAR board — the first to adopt this system — saw a surge in equity offerings in the first half of the year. Ample liquidity and a still-loosening monetary policy will also help sentiment, even as most major global economies such as the U.S. and Europe raise interest rates to tamp inflation.
Advantage mainland
At least 460 companies are poised to list on the mainland's five exchanges and a minimum 660 billion yuan will be raised in 2022, according to Deloitte China's Capital Market Services Group.
The IPO momentum and pipeline are "growing steadily as a result of economic performance driven by government expansionary fiscal and monetary policies," Go said, adding that technology is likely to remain the leading sector in terms of the number of deals coming to the market. In addition, EY expects upcoming IPOs to include an unnamed luxury sports-car maker from Europe, an insurance company in Asia-Pacific and a social media company from the U.S.
The registration-based IPO system, currently adopted by STAR board, Shenzhen's ChiNext and the newly established Beijing Stock Exchange, makes the listing process easier as issuers only have to deal with the bourse, instead of both the exchange and the China Securities Regulatory Commission.
The STAR board was the first exchange allowed to vet IPO proposals to make sure that applicants had made adequate disclosures and followed proper procedures. The China Securities Regulatory Commission remains the final authority to approve IPOs, but the responsibility of making sure that the information companies provide is accurate shifts to stock exchanges under the registration system.
"Full adoption of the registration-based mechanism, which delegates the supervisory responsibility to the exchanges, could continuously be the driver for the upcoming IPOs," said Fang Xiaojie, Shanghai-based senior partner at Allbright Law Offices, as the exchanges would have more power and capacity to process applications.
Hong Kong lull
Meanwhile, Hong Kong lost its top spot in the global IPO ranking in the first half. Hong Kong, usually among the top three listing venues in the world, saw IPO proceeds slump 92% in the first half amid an adverse interest rate and valuation environment. The city, which pegs its currency to the dollar, follows the U.S. Federal Reserve's monetary policy.
Restrictions on movement of people between mainland China and Hong Kong to control the COVID-19 pandemic has also put several IPOs on the bench. "This will likely remain a major overhang for the Hong Kong IPO market," said Dickson Ng, partner at law firm Eversheds and Sutherland.
Hong Kong may attract fund raising of between HK$180 billion and HK$200 billion in 2022, according to PriceWaterhouse Coopers, a drop of at least 44% from last year.
While the second half of the year may remain as challenging as the first six months, Hong Kong remains an attractive listing venue for "high quality U.S.-listed Chinese enterprises" given the city's status as an international finance hub, said Benson Wong, lead partner for entrepreneurial and private business at PWC.
Hong Kong's IPO pipeline remains strong, according to the stock exchange operator. A possible dual listing by Alibaba, which said in July that it is seeking a dual listing in the city, may act as a boost for Hong Kong's tally and open the doors for many others.
Many of the U.S.-listed China concept stocks "will be keen to explore different ways of listing in Hong Kong," said Edward Au, southern region managing partner, Deloitte China. It could even include "delisting from the U.S. and re-listing in Hong Kong through acquisition by a special purpose acquisition company," Au said.
As of Aug. 1, US$1 was equivalent to 6.77 Chinese yuan.