In recent years, anything with the magic word "China" in the name has been sufficient to attract all manner of international investors, desperate to finance share listings by mainland firms. 

The fervor for new mainland stocks has been magnified over the past six months, as a resurgent Hong Kong market has helped usher through initial public offerings (IPOs) by many of the mainland's largest firms.

And with a further US$20 billion worth of mainland issues in the pipeline, investors from across the globe are expected to continue investing in China.

Two recent examples highlight this gold rush mentality.

While there were some big mainland initial public offerings in 2003 including Ping An Insurance, Great Wall Auto and China Resources Power, nothing came close to topping China Life Insurance, which raised US$3 billion in a dual Hong Kong and New York listing in December (see table), the biggest global offering that year.

Perhaps more symbolically, when investors last December realized that a company with both "China" and "gold" in its title was about to list, it caused such hysteria that the Fujian Zijin Mining Company found its listing a staggering 744 times oversubscribed.

Both highlighted the steps China has taken to becoming an integral part of the world's stock markets and investment environment since its World Trade Organization (WTO) accession in 2001.

But amid the euphoria, some much-needed pragmatism seems to have entered the fray, suggesting that while most Chinese firms continue to push for listings as soon as possible, the path may be blocked for some enterprises.

Faltering markets

After a recent bullish 11-month run, Hong Kong's stock exchange has faltered in recent weeks.

The Hang Seng Index saw another losing day on Friday, closing down 25.61 points at 12,790.58. It has now lost more than 8.6 percent since the start of March, hit by weak US economic figures, global terrorism fears and some weak financial results by major Hong Kong firms.

The past two weeks have seen the index return to its levels at the beginning of the year, and analysts say a protracted correction in Hong Kong could hit the listing plans of some mainland enterprises.

"If the (current) correction continues, some companies will have to cancel plans to list," said Nilesh Jasani, Asian strategist at HSBC.

Jasani picked out mid-sized firms with market capitalization of up to US$2 billion as those likely to face the most pressure to delay listings until the market picks up steam again.

Analysts believe bigger mainland firms will face little pressure to scrap listing plans.

"Investor appetite for big mainland stocks will continue to remain very strong, particularly for 'Beijing's babies' -- the enterprises China wants to become capable of competing with foreign firms following its WTO accession," Louis Wong, director of Phillip Securities in Hong Kong, told China Daily.

Analysts picked out other mainland firms unlikely to find their listing plans delayed merely by market wobbles as being Ping An Insurance, China Construction Bank, China Power International and China Netcom.

Analysts picked out the most vulnerable sectors for stock market fluctuations as being Internet firms, online businesses, mainland media-based firms and chipmakers.

Wong said there had been "particular reservations" about SMIC following inaccurate statements made by a company official concerning cash supply for capital spending in the run-up to the IPO.

Lack of capital?

A generally lackluster market also raises a secondary question -- could there be too little liquidity in Hong Kong's faltering market to go around? Will some mainland firms have to abandon their Hong Kong listing plans this year if liquidity is mopped up by their larger peers?

Very possibly. In the run-up to China Oriental Group's HK$2.21 billion listing earlier this month, analysts complained constantly that poor market performance was attributable to investors holding back funds in readiness for the steel group's flotation.

This retention of funds continued for over a week, and concerned a HK$2 billion listing by a mid-tier steel group.

A listing by a really hefty mainland firm -- say, the proposed US$5 billion dual Hong Kong-New York listing by China Construction Bank, one of the mainland's big four state-owned lenders, would mop up an enormous amount of liquidity for a considerable period.

This would make it all the more difficult for smaller, less prominent firms to attract sufficient attention and capital from investors.

Beijing's concerns

Another brake on Chinese firms' listing plans may come from Beijing, which is aware that not all growth is necessarily good, and may soon impose its own restrictions on Chinese firms looking to list shares.

The Chinese government is fully focused on sustaining its booming economy, and encouraging rising wealth, but it is also keenly aware of the perils of overcapacity.

The property, cement, steel, autos and aluminium sectors are all being threatened by over-investment and replicated investment, which Beijing knows could bring China back to deflation further down the line.

One way to halt rising production and investment is to cut off or limit a firm's ability to raise capital from mainland banks, but firms can also generate capital from other sources, notably by listing shares on the stock market and using net proceeds to invest in new plants and equipment.

Recent state media reports suggest that the China Securities Regulatory Commission (CSRC) is putting together a proposal that will prevent firms deemed to be in overheating sectors from listing shares.

This is designed to force unlisted firms to scrap expansion plans and, hopefully, reducing overcapacity in their sectors.

"Some companies could be held back (from listing) due to the sectors they are in, particularly in aluminium, cement, autos and ferrous metals," said Tim Condon, head of Financial Markets Research Asia at ING.

"These sectors are being closely scrutinized by the central government, and they would generate too much publicity if they list. The central government knows that there are pockets of overheating and (it is) poised to clamp down further."

It remains unclear whether all or just some firms in overheating sectors would be affected by Beijing's tougher stance, but Phillip Securities' Wong picked out property firms as the most likely to be prevented from pursuing IPOs.

The mainland's Shanghai Forte Land debuted on Hong Kong's main board last month, but Wong said Soho Land's plans to list shares in Hong Kong was probably doomed to failure, as the government tries to rein in "easy" capital available to many property firms by local officials.

Picture remains rosy

In the final analysis, however, the picture is generally sunny for the majority of firms.

Most mainland firms with IPO plans already firmly in place remain on track to secure capital via stock market listings this year. Smaller firms and enterprises in sectors growing too far and fast only need worry being left out of the gold rush.

But even then, many are bound to succeed, as the China success story continues to go from strength to strength.

Condon said international investors are maintaining a healthy attitude towards China, adding that "they still really want the mainland companies. The fundamentals for Hong Kong are still positive, and the China story is still a driving story for investors."

"That's not going to change anytime soon."

(China Daily March 22, 2004)