359 initial public offerings were listed in Shanghai and Shenzhen in the first 10 months of 2017, a record amount. However, IPO stocks have been by far the worst performers for a second year running, with a Shenzhen index of newly listed companies shedding 32 percent so far this year.
So what is going on with Chinese IPOs? The uptick in the number of companies getting listed on the mainland suggests more is being done to lure potential unicorns away from IPOs in the U.S. or Hong Kong. However, a poor stock market performance suggests investors are not convinced.
CSRC move to slow down speculation
2016 saw the Shenzhen IPO index plummet 21 percent, and 2017 promises to be even worse. One of the most significant factors has been the China Securities Regulatory Commission (CSRC) pushing ahead with greater curbs on speculation.
The CSRC now has greater powers to force companies to halt trading if it sees wild oscillations in stock prices, and the vetting process for IPOs is much tougher – only 57 percent of applications have been approved since October, compared to as many as 90 percent in previous years.
The CSRC has also moved to increase the supply of new shares, which has slowed down investor demand and, as a result, reduced speculation.
2017 has also been a year very much dominated by familiar Chinese giants rather than new unicorns on the block – Tencent (113.8 percent), Moutai (97.5 percent) and Alibaba (92 percent) have seen their share prices boom.
For many investors, comparing these impressive gains with declining IPO stocks means it is a no-brainer on where they should be putting their money.
While a record number of companies have listed in Shanghai and Shenzhen this year, quality comes before quantity when it comes to attracting investment. The success of Alibaba and Tencent's respective listings on Wall Street and in Hong Kong has pushed other major Chinese companies to think twice about floating on the mainland.
More Chinese companies listing overseas
Lending platform Qudian launched the biggest Chinese IPO of the year in New York in October, and by November, 11 Chinese companies had listed in the U.S. – the most since 2014. The Hong Kong debut of China Literature Ltd. – an e-book unit of Tencent – saw the company's share price double on day one as it raised 1.1 billion U.S. dollars.
Looking at the general performances of IPO shares in other markets, it isn't hard to understand why major Chinese companies are opting to go overseas. The Renaissance Capital IPO index, which measures the top 80 percent IPOs listed in the U.S., has grown 34.5 percent in the past year.
Since September, a fifth of U.S. listings have been Chinese companies – when faced with the 32 percent losses on the Shenzhen IPO index, it makes sense to list on Wall Street.
While IPO shares have been the worst mainland performers of 2016 and 2017, the CSRC is continuing to push ahead with reforms to make it easier to list in Shenzhen or Shanghai.
It now takes an average of 15 months to go through the CSRC's IPO vetting process, and new guidelines for companies published last week are designed to boost transparency and market stability.
Looking ahead to 2018, next year is expected to see at least three major Chinese companies launch IPOs. Online services group Meituan Dianping and fintech company Lufax have been valued at 30 billion and 18.5 billion U.S. dollars respectively, but smartphone giant Xiaomi is set to grab the headlines.
Reuters cites a source at Xiaomi as saying it could launch the world's "largest technology IPO" in 2018, and that a valuation of 100 billion U.S. dollars would "not be a crazy number."
For the CSRC, attracting companies of that caliber to list in Shanghai or Shenzhen remains highly unlikely – the priorities for the year ahead will be continuing to boost stability, stem losses among newly listed companies and to boost the quality of future IPOs to attract real investment.