Chinese IPOs surge in Shanghai and Shenzhen stock markets

It’s a rare investment that can return 70% in just a few days. But investors are finding exactly that in Chinese initial public offerings this year, thanks in large part to the Chinese government. 

All 58 IPOs making their debuts in China’s Shanghai and Shenzhen stock markets this year have risen by nearly the maximum 44% allowed on the first day of trading. In the following five days, 57 have gone on to average further gains of 24%. The 58th IPO launched Friday.

The eye-popping gains can be credited to China’s financial regulators, who shut down the IPO market for 14 months before reopening it at the start of this year. Before the first listing in January, regulators had added the 44% cap on first-day gains and demanded that companies sell their shares on the cheap, providing the fuel for a first-day pop.

The pent-up demand for IPOs has made them the hottest China commodity in an already volatile stock market mostly filled with fast-trading individuals. The immense appetite, though, has left potential buyers fighting to obtain the new stocks and generated echoes of the late 1990s in the U.S., when buyers scrambled to buy hot technology stocks.

China’s current approval-based IPO system has long been criticized for distorting supply and demand in one of the world’s largest stock markets. Listing aspirants have had to endure an application process that can include roughly 10 rounds of reviews and last as long as several years. There are still 637 companies on the waiting list for approval.

“The regulator has again created a situation where there are more monks than the porridge available,” said Zhang Gang, senior analyst at Central China Capital Securities, using a traditional Chinese saying. “It’s all about giving away more gains to a secondary market dominated by retail investors, but such reforms do have a strong administrative flavor.”