More efforts to reform Chinese stock markets needed to draw in investors, companies

By Li Qiaoyi Source:Global Times Published: 2016/12/4 21:48:39

Chinese executives appear unfazed by predictions from economists that the Chinese economy is on course to decelerate, as new survey findings suggest that Chinese companies are largely optimistic about their revenue growth over the next three years and are gearing up for equity raising.

However, China's domestic stock markets, where valuations can be a multiple several times over of what similar companies could get in overseas markets, still take a backseat to those overseas markets, per the findings of the China Capital Market Insight Survey 2016 recently released by PwC, which indicated positive changes in capital raising practices in the domestic market as well as the need for more efforts by the Chinese authorities to regulate its stock markets.

Out of the 108 companies surveyed 65.9 percent said potential valuations were still the most important factor for IPO venue decision-making, yet many of the companies expressed their intention to seek a listing overseas, citing the ease of listing and also stock trading liquidity.

This is an indication that domestic firms eager to raise capital in the equity market are quite sober-minded. They have realized that the premiums of strong valuations in the domestic markets - essentially a reflection of the dominance of retail investors who are prone to speculation - are unlikely to continue forever. On top of that, the companies that are capable of getting impressively strong valuations are rare and increasingly concentrated among industry heavyweights.

The preference toward overseas floatation despite the optimism about the Chinese economy also highlights the need for stronger and more urgent actions to rectify the domestic equity market that has not paid due attention to the true value and worthiness of A-share companies.

Given the heavy presence of retail investors, highly susceptible to a casino-like mentality, it's unlikely we will see a makeover overnight, but incremental changes through tougher efforts pushed by the market regulator to enable a more transparent and market-oriented regulatory regime will make domestic markets appeal more to both investors and companies seeking a listing.

It's worth pointing out that in addition to efforts to lower frothy stock market valuations, there's more work awaiting China's market regulator, who should also speed up the country's transition toward a registration-based IPO system to increase stock trading liquidity and ease listing.

The author is a reporter with the Global Times.

Posted in: INSIDER'S EYE

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