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China’s US$50b bid for market calm might backfire

[HONG KONG] China's near-US$50 billion bid for market calm might backfire. The securities regulator last week approved six new funds that will guarantee demand for a string of Big Tech listings, while locking up backers' money for three long years. The intention is probably to dampen a frothy market, but there could be unintended consequences: thinly traded stocks that are, in fact, more volatile and fund investors who might end up regretting being trapped.

Individual buyers and institutions alike can invest in the new funds, which are each raising up to 50 billion yuan (S$7.8 billion), or about US$47 billion in total. The resulting vehicles will act as "strategic investors", getting priority allocation of shares in new listings in exchange for holding the stocks for extended periods.

The innovation is part of Beijing's wider effort to ensure enough demand while keeping wild price swings in check. Regulators last week finalised new rules to allow smartphone-maker Xiaomi, e-commerce titan Alibaba and other offshore-listed outfits to sell shares at home using so-called Chinese depositary receipts. But mainland exchanges are dominated by mercurial everyday punters who pile in and out of stocks on a whim.

Yet tying up a huge chunk of shares could make the market choppier. Analysts at Morgan Stanley reckon near-term CDR supply could total some US$55 billion. If so, the six funds combined would account for most of that, and reduce the actual number of tradable shares.

Foxconn Industrial Internet's recent US$4.3 billion initial public offering enlisted 20 strategic buyers, mostly state-owned funds, with lockup periods for as long as three years. That meant less than 6 per cent of shares outstanding were free to trade – probably one reason, alongside a low initial valuation, why FII stock subsequently soared.

The three-year restriction on investors withdrawing money is highly unusual too. In the West, it is rare to see such lengthy prohibitions, even for the hottest hedge funds. If the current exuberance about Chinese tech were to turn sour, investors would find they had no way to sell and limit their losses. Given a widespread belief that Beijing ought to bail out investors if things go wrong, that could create an even bigger headache for regulators.


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