China may change IPO pricing after scrapping debut trading cap

Shanghai

CHINA'S securities regulator may consider changes to the current pricing mechanism of initial public offerings (IPOs) after removing the first-day trading cap, according to a senior official.

"I think the direction is clear," Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said on Thursday in a Bloomberg Television interview with Haslinda Amin on the sidelines of the World Economic Forum in Davos, Switzerland. He said it takes "careful consideration to find a correct way" to remove the cap.

Newly listed companies are capped at a 44 per cent advance on their first day of trading, a rule put in place in 2015 to limit speculation. Meanwhile, most first-time offerings in China are subject to an unwritten rule that they cannot be priced higher than 23 times earnings.

"Without getting a good indication from the secondary market trading, there's no way you can price the IPO correctly," Mr Fang said. "Hopefully, after removing the first-day trading of new shares, we will have a better sense about how we can go about the IPO pricing."

Buying IPO shares in China provides almost guaranteed gains because of the tacit cap imposed by regulators, creating fierce competition for the stock among fund managers. Some managers have rolled out funds which advertise a strategy of maximising the chance of buying into new share offerings.

Policy makers are looking to revive sentiment and volumes in a stock market that lost more than US$2 trillion in 2018. One possible route is by attracting technology IPOs through the creation of a new trading venue. BLOOMBERG