TOKYO/SHANGHAI/HONG KONG -- Initial public offerings in mainland China's two stock exchanges, Shanghai and Shenzhen, fell 75% on the year in the six months through June, a decline widely attributed to Beijing's attempt to limit listings as fears of trade war weigh on share prices.
The number of listings on the two exchanges fell to 61 in the first half of 2018 from 246 a year earlier, according to Ernst & Young. With share prices sinking amid concerns about an economic slowdown triggered by the trade friction between China and the U.S., regulators are thought to be reining in IPOs in an effort to avoid oversupply.
A stricter screening process is seen as the catalyst for the plunge. Authorities have grown wary of companies listing to make a quick buck. If businesses try to use IPOs to pay off excessive debts, it may very well expose individual investors to losses. Individuals account for 80% of all trading in China.
Chinese authorities are also concerned about excessive valuation of startups because overpriced IPOs can cause volatile market swings, said Deloitte China's Ou Zhenxing.
The review process grew stricter this year after share prices took a downturn amid the looming China-U.S. trade war, with regulators now rejecting an estimated 40% of listing applications. Shanghai stocks now trade about 20% below this year's high, and the market may be destabilized further if more investors unload shareholdings to fund purchases of newly listed shares.
Draconian restrictions have been blamed for scaring would-be debutants away from mainland markets. China in effect caps public offering prices at 23 times earnings per share. Though no reason has been provided for this limit, it has ensured that that all participants in IPOs, including government-affiliated funds, can make money.
This rule has forced some companies to raise funds at a lower valuation than might otherwise be merited. Contemporary Amperex Technology, the world's largest maker of automotive batteries, closed up by the 10% daily limit in each trading session after its June 11 debut through June 21, and has since climbed to more than triple its IPO price.
BGI Genomics went limit-up every trading day for nearly a month after its July 2017 listing. If the company had been able to reflect true investor demand in its offering price, it likely would have brought in more money from its IPO.
This excessive government intervention, along with other practices underscoring the market's immaturity, is spurring a growing number of companies -- including some of mainland China's biggest names -- to opt for U.S. or Hong Kong listings instead.
IQiyi, a video-streaming unit of search engine Baidu, listed on the U.S. Nasdaq in March. Smartphone maker Xiaomi debuted Monday in Hong Kong after scrapping plans for a simultaneous mainland listing in light of worsening market conditions.
All told, 15 Chinese companies debuted in American markets between January and June, up from just two a year earlier, while Hong Kong listings surged nearly 50% to 97.
With many more big players expected to emerge from mainland China, stock markets are vying for their business. In an effort to lure mainland tech enterprises, Hong Kong Exchanges & Clearing said in April it will allow listings by companies with multiple classes of stock carrying different voting rights -- a category that includes Xiaomi.
Online booking platform Meituan Dianping, which also has a dual-class share structure, filed last month for a Hong Kong IPO. Ride-hailing company Didi Chuxing is considering listing there as well.
Chinese companies have often listed in multiple markets, offering both yuan-denominated A-shares on the mainland and H shares in Hong Kong. Now, "the 'H first, A later' trend will probably continue," said Dick Kay Man Wo of Deloitte China.