Wednesday July 29, 09:53 AM
Largest share flotation in 16 months soars in China
SHANGHAI (AFP) - China State Construction Engineering Group shares soared nearly 60 percent at their Shanghai debut Wednesday, as investors jumped at the world's largest stock offering in 16 months.
China's largest home builder ended the day at 6.53 yuan (one dollar), up 56.2 percent from an initial public offering price of 4.18 yuan, according to traders.
It had reached an intra-session high of 7.96 yuan, representing a 90.4-percent increase over the IPO price.
However, the stock's sharp rise contrasted with the overall market, which finished the day five percent lower as dealers moved to lock in profits from several weeks of strong rallies.
China State Construction Engineering's IPO last week raised 50.16 billion yuan, making it the largest since US credit card group Visa Inc. raised 19.7 billion dollars in March 2008, according to financial data provider Dealogic (LSE: DL.L - news) .
But the huge interest in the company that built Beijing's "Water Cube" Olympic aquatics centre on Wednesday set alarm bells ringing that the market was losing touch with the fundamentals.
Wang Mingzhi, a Shanghai-based analyst with GF Securities, said the share price was above a "fair value" of about five yuan, which he said would more adequately reflect the company's actual earning potential.
"The jump is obviously driven by speculative funds. It's hard to find a rational explanation," he told AFP.
China ended a nine-month moratorium on IPOs in June, but it remains wary about overly dramatic price fluctuations on the first day of trading in new stocks.
While allowing new IPOs, the securities regulator has issued rules aimed at reining in large surges in their price, including a ban on investors using multiple accounts.
Banking regulators have also tightened lending rules in an attempt to prevent bank loans, extended as part of China's economic stimulus measures, from being used to speculate on the stock market.
But the moves seem to have had little effect. Sichuan Expressway, China's first IPO after the moratorium, tripled at its debut in Shanghai on Monday.
Mao Nan, a Shanghai-based analyst with Orient Securities, called China State Construction Engineering's stock price "overvalued", saying it reflected the impact of speculative funds from China and overseas.
"Hot money is flowing into the share market at the moment. With lots of cash at home and capital flowing in from abroad, the main problem of the market is excessive liquidity," he said.
While share prices are allowed only to fluctuate within a daily 10-percent trading band, there are generally no limits on how much they can move on the first day of trading in China.
The underlying logic is that Chinese shares usually rise steeply on their debut, and it is considered better to let investor enthusiasm play itself out within just one session.
The alternative would be that newly listed Chinese shares close limit-up for several sessions after their initial debut.
China's securities regulators halted IPOs in September 2008 amid worries that pressure on liquidity would worsen the already ailing domestic markets.
The key index plummeted 65.5 percent last year as the global financial crisis kicked in.
However, before Wednesday's dive it had rebounded more than 80 percent since the beginning of 2009 to become one of the world's best performing markets.
Given the market conditions at the moment, China will probably go on approving large IPOs, analysts said.
"Regulators will certainly take into account the market's ability to absorb new shares," said GF Securities' Wang.
"So far, there is no sign that the market is impacted significantly given the ample liquidity. Since there's no such concern at the moment, new IPOs are likely to continue."
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