SHANGHAI/HONG KONG -- The number of Chinese companies raising funds from new share issues and initial public offerings rose in the January-March period for the first time in five quarters as the inclusion of mainland stocks on U.S. and European indexes draws foreign investors.
The 82 equity financing transactions, including IPOs and third-party share placements, in the quarter represent the first increase since October-December 2017. A total of 74.7 billion yuan ($11.1 billion) was raised in the first three months of 2019, up 80% from 40.6 billion yuan in the prior quarter.
The scope of companies receiving funds widened as well. Among those were Yunnan QuakeSafe Seismic Isolation Technologies, a developer of anti-seismic devices; CSPC Innovation Pharmaceutical, a maker of medicinal ingredients and health foods that raised over 1.2 billion yuan; and Ningbo Ginlong Technologies, which mainly produces electrical equipment for solar power generation.
Over 50 companies have applied to be part of Chinese President Xi Jinping's planned Science and Technology Innovation board on the Shanghai Stock Exchange, with chip-related businesses comprising nearly 20%, as capital markets contribute to the development of Chinese industry. Advanced Micro-Fabrication Equipment, a maker of chip manufacturing products, devoted 30% of its sales to research and development on average for the past three years.
Overseas index providers have also provided tailwinds by including Chinese stocks in their benchmarks. New York-based MSCI began including mainland shares in its emerging companies index last June and will increase their weight three times in 2019. The U.K.'s FTSE Russell will do so for the first time in June, followed by S&P Dow Jones Indices in September.
BNP Paribas estimates that an extra $28 billion will pour into Chinese stocks from MSCI's weight increase alone. JPMorgan Chase expects mainland shares to reap $150 billion in benefits by March 2020 from all index inclusions.
Though these index providers have mainly targeted the largest Chinese companies, the SSE Composite Index of all issues on the Shanghai exchange has risen nearly 30% year-to-date. The stock market recovery has created breathing room for domestic investors, further improving the fundraising environment.
Partial deregulation in China involving transactions and foreign ownership contributed to the inclusion of mainland shares on U.S. and European indexes. The Stock Connect mutual market access scheme, for instance, allows overseas investors to purchase Chinese stocks through Hong Kong.
"The Chinese authorities have continued to introduce reforms designed to open their market to international investors," FTSE Russell wrote in a recent report.
But stock holdings by foreign investors are nearing the 30% cap, and some purchases on the mutual market access scheme have been restricted. Chinese authorities verbally intervened several times as mainland shares were sold off in the second half of 2018, curbing IPOs. The future of China's financial reforms will determine whether the country can maintain this virtuous cycle.