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Deluge of new shares to heap pressure on China's market
[BEIJING] China's resilient financial markets may come under a new source of pressure: a flood of share sales and corporate-bond issuance as firms rush to make the most of favourable policies.
Forty mainland-listed companies announced plans in February to sell additional shares, the highest since April 2016, according to Bloomberg-compiled data. The value of onshore corporate debt issued by Chinese borrowers last month more than doubled year-ago levels.
While Chinese regulators expect greater corporate access to financing to help cushion the coronavirus impact on an economy that was already slowing, a spike in equity and bond supply is likely to siphon off cash from existing securities at a time when concern about the economic fallout from the epidemic is growing.
"I have already started to worry about the rising funding pressure on the stock market" in China, said Jiang Liangqing, a fund manager at Ruisen Capital Management in Beijing.
"When economic data and corporate earnings start to reflect the impact of the virus outbreak later this year, the eagerness of listed companies to raise money will be the last straw to crush the stock market."
The resilience of Chinese financial assets last month was built on optimism about government liquidity, but showed signs of falling apart last week with surging volatility amid a global stock rout. Yet while the Shanghai Composite Index had its worst week in 10 months, some stock benchmarks globally had their worst in 10 years or more. The Shanghai gauge rose 2.1 per cent as of 10.22am local time after falling 3.7 per cent on Friday, which was the biggest decline since the record sell-off on Feb. 3.
Nonetheless, pressure on the domestic market is increasing, after foreign investors sold an average US$844 million of Chinese shares per day last week, the heftiest selling on record. Data released on Saturday showing an official gauge of manufacturing in China fell to a record low.
On March 1, China's latest amendments to Securities Law took effect, which replaced a stringent approval system with a registration-based method for companies to issue exchange-traded debt. Financial stocks, in which brokerage shares have a nearly 21 per cent weight, gained 2.4 per cent in early Monday trading, one of the best performers on the CSI 300 Index of large caps.
Last month, China's central bank vowed to guide borrowing costs lower, and the country's securities regulator significantly relaxed the grip on public companies' follow-on stock offerings. They're among myriad government efforts to bolster economic growth amid persisting production hiccups due to the virus outbreak.
Among key changes to the rules on selling additional equity, the China Securities Regulatory Commission shortened by half the lock-up period for shares placed privately and allowed companies to provide bigger discount to lure investors. Also, firms on the small-cap ChiNext no longer have to be profitable for two straight years before being qualified to hold non-public stock offerings.
Most of the firms announcing equity-sale plans in February were cash-strapped, not-state-owned entities. "The private sector has been suffering from severe funding crunch in the past several years" due to the government's deleveraging campaign, said Li Changmin, managing director at Snowball Wealth in Guangzhou. "So nearly all companies in the private sector are likely in demand to raise money."
One firm not low on cash but still announcing a stock-sale plan last week was profitable Chinese battery giant Contemporary Amperex Technology (CATL), a supplier of Tesla. CATL is looking to raise as much as 20 billion yuan (S$3.98 billion) in a private share placement to fund research and expansion efforts. Its stock fell 11 per cent in the two days following the announcement, cutting 2020's gain to 28 per cent.
While the new stock-sale rules will "make financing new investments easier, which can boost earnings growth", Capital Securities analyst Amy Lin said, "They may not be as good for the secondary market given the potential liquidity drainage."
Policy makers will have to tread a fine line between meeting the financing needs of companies, particularly small businesses, and preventing a stock market rout as the coronavirus' domestic economic impact becomes clearer. The Shanghai Composite fell 12 per cent in 2016, the most in five years and among the world's worst performers, as a record 1.1 trillion yuan of additional shares was sold. Authorities clamped down on such offerings, and just 135 billion yuan was issued last year.
"Maintaining a stable stock market while giving more companies access to funding will be a key task for regulators this year," Mr Li said. "Authorities will likely adjust the pace of share-sale approvals when the stock market goes down."