- Long term positive China on reform and liquidity.
- Medium term volatility from valuations and IPO issuance.
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There are reasons to be optimistic about the Chinese economy in the long run due to structural reform. Current growth rates will slow but China is reorganizing itself to a more durable model.
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Political reform, notably the leaning away from rule of Party to rule of Law. The renewed importance of the Chinese constitution.
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Economic reform. Refinancing the local governments, lowering debt service costs. Rebalancing leverage away from over leveraged local governments and corporates towards households and central government.
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Financial market reform. The introduction of market discipline such as fewer bailouts and thus more use of the bankruptcy code.
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The PBOC is in the midst of expansionary policy.
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QE lite via LTROs with muni bonds as HQLA collateral.
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Cutting interest rates
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Cutting RRR.
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General deregulation of the banking and savings industry.
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This will favor the banks.
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The stock market has been very volatile.
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Valuations in parts of the market have overshot fundamentals.
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The market has simply run up too high.
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IPOs are sapping fund flows.
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Not all parts of the market are overvalued.
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HSCEI is trading on 9.4X 2015 est earnings.
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SHCOMP is trading on 17.5X
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Shenzen is trading on 36.9X
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ChiNext is trading on 97.2X
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Today we take a look at IPO activity.
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Market capitalization is rising faster than SHCOMP due to the increased volume of IPOs.
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June MTD China announced IPOs total over 75 billion USD (as at 26 June). This compares with an average of 27 billion per month for the last 12 months.
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We estimate the 12 month cumulative IPO volume as a percentage of market capitalization in the second chart below*. IPO volume is definitely diverting capital away from the market.
Chart 1: Normalized Market Cap, SHCOMP and IPO issuance.
Chart 2: IPOs as a percentage of Market Cap. 12 month moving sum.