CHINA ESQUIRE

Right when I finally post something somewhat negative about the health of the Chinese economy, another news piece goes ahead and tells us what we probably don’t want to hear: that some of the explosive growth (a bubble?) that we had been expecting is slowing down. The International Herald Tribute published an article called “ Tough Times for Chinese IPOs” ( h/t to China Digital Times) and had this to say:

When stocks in three big Chinese companies sank below their initial public offering prices last week, investors who bought shares in last year’s offers suffered. China’s once-roaring IPO market is another casualty.

After spectacular growth last year, when mainland China eclipsed the United States as the world’s biggest market for initial public offers of equity, sliding stock prices and concern about oversupply threaten to stifle activity this year.

“The bubble is bursting after rampant speculation pushed prices of newly listed shares to ridiculously high levels at the peak of China’s stock bull run late last year,” said Zheng Weigang, head of research at Shanghai Securities. “This will slow equity fund-raising in coming months and deter the overpricing of new offers and new listings.”

The IPO flood, in which deals were greatly oversubscribed by investors, appeared to be a major achievement of China’s financial reforms, for the first time making the stock market an important source of funding for many companies.

But a collapse of confidence, due to factors including slowing corporate profit growth and plans for huge cash calls by listed companies, has sent the main Shanghai index plunging more than 40 percent below October’s record peak. That plunge led to a virtual halt in IPOs in March; the only one was the $53 million sale by Fujian Fujing Casttech, a maker of laser equipment. By contrast, five companies raised $300 million in March last year.

But a lack of big offers in the pipeline means that China’s IPO activity this year will shrink substantially from 2007.

Last year, the market expected several of China’s big Hong Kong-listed “red chips,” like China Mobile, to list in Shanghai in 2008. That now looks unlikely.

Shares in three large companies - China Shipping Container Lines, China Coal Energy and China Pacific Insurance - have fallen substantially below the prices of their IPOs. They were the first major stocks to do so since the ban on offers was lifted.

Even after IPO activity picks up, offerings will be priced more conservatively and enjoy smaller increases on listing day, analysts predicted.

Where do I begin? I have publicly stated that I didn’t think this would be the year that some of the Chinese stock market bubble would burst. I had been thinking that it was 2009. But if IPO’s are no longer the much-hyped events that they used to be, that means one of two things: (1) that the bubble will not burst because corrections are starting to happen already. There will be no need for a large scale decline as long as little declines are happening. (2) That the bubble is already starting to burst and we will see a decline or even a freefall from this point forward. (3) a combination of the two: things haven’t gone to hell in a handbasket quite yet, but it will later.

I am not an economist–I am an attorney. (which was some of the source of chagrin for Dan Harris at CLB given the scope of events happening in China that are not law related) While I am not afraid to venture out, this sort of prediction is not within my reason at all, so I won’t care to speculate on this.

What I am concerned about is this: lower valuations and decreasing IPOs is rather reminiscent of the first signs of some sort of slow down. And that spells bad news for the service professionals who thrive on IPOs: i-bankers, accountants, and lawyers. If valuations are less, companies will be more hesitant to go public. There is possibility of a downward trend. Which should make Chinese service professionals wary. Are we talking layoffs? I don’t know, and I sure hope not. Are we talking less work to go around? Likely, which means competition to do the deals that people didn’t want one or two years ago will grow.

Much of this is speculation at this point, but it doesn’t hurt to sound the alert for Chinese related service professionals: it may be time to tighten your belts and compete.

UPDATE: Jack Perkowski at Managing the Dragon had a post entitled “ The Sounds of Bubbles Bursting” where he talks about how there are signs of the economy slowing.  Here are some excerpts:

“This place has bubble written all over it.”

You don’t have to be a finance professor to come to the same conclusion. Signs are everywhere—from an inflated stock market, to growing inflation to ever increasing apartment prices. The questions are: Does China have a hard or soft landing, and what does it feel like? What happens after the Olympics?

All of this suggests an economy which will begin to slow, if it has not already. What the rest of 2008 brings, and whether the inevitable emotional letdown after the Olympics has an economic impact, is anyone’s guess.

Trackback URI | Comments RSS