Breakingviews - Chinese lender IPO mess holds rules up to ridicule

A man wearing a protective mask is seen inside the Shanghai Stock Exchange building, as the country is hit by a new coronavirus outbreak, at the Pudong financial district in Shanghai, China February 28, 2020. REUTERS/Aly Song - RC2Y9F9NSHR6

HONG KONG (Reuters Breakingviews) - A Chinese lender’s farcically volatile initial public offering is holding archaic market rules up to public ridicule. Xiamen Bank shares surged by the maximum allowable 44% in their Shanghai debut this week. That’s par for the course on primary mainland boards, but a day-two 10% plunge is not.

Xiamen Bank raised around $260 million at over 10 times 2019 earnings. That’s nearly twice as high as the industry average, per an analysis by trade publication IFR. Its net interest margin is well below peers, but it’s also valued at 1.3 times historical book value. Constituents of the CSI Chinese bank index on average trade at about 80%, according to Refinitiv data.

Chinese lenders need fresh capital to cope with growing piles of bad credit. Xiamen Bank, with a $40 billion balance sheet, knew it could count on a warm reception, because shares of nearly every company listed on Shanghai’s main board rise 44% from day one. Such pops once reflected semi-official directives from the China Securities Regulatory Commission that applicants should price no higher than 23 times earnings, which left funds on the table for retail speculators. This one-way bet has acquired a circular logic: Xiamen Bank’s shares gained 44% because all Chinese IPOs rise 44%.

For state financial institutions, there’s a political twist. No bank executive can list at a discount to book value, which would imply having wasted the people’s assets – even though that’s precisely what many have done. This produces an absurdity; everyone can see that investors discount Chinese banks in secondary trading, but they know the price will initially rise anyway. That leads to whopping demand for shares that are quickly dumped. Xiamen Bank’s offering was more than 3,000 times oversubscribed. The only thing unusual in this case was that the interval between inflation and correction was measured in hours, not months.

This tightening gyre is a problem. Recapitalising banks hammered by the pandemic is essential, but IPO mechanisms doom them to sink, as occurred with Postal Savings Bank of China in 2019. That deters private investment. Beijing is removing other counter-productive price guidelines. This one’s time has come, too.


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