【Epoch Times June 18, 2024】The Shanghai Composite Index experienced a sharp decline from the beginning of this year to February to multi-year lows. The Chinese Communist Party’s intervention in the stock market led to a rebound in stock indices, which was criticized for distorting the market, especially as authorities tightened control over initial public offerings (IPOs). Experts believe that the CCP’s actions will create a vicious cycle, not only failing to address the chronic issues in the stock market but also ultimately failing to boost the stock market as intended.
The overall performance of the Chinese stock market has been volatile this year. At the beginning of the year, mainland A-shares experienced a widespread decline, breaking below the 2800-point mark multiple times. The “national team” entered the market to stabilize…
An article from The Economist recently pointed out that during the turmoil in the Chinese stock market, while the “national team” intervened to rescue, they also resorted to more destructive methods to repair the market.
The article mentioned that to boost stock prices, authorities tightened control over IPOs. As private investors find it increasingly difficult to find exit opportunities, state-owned capital has become more dominant. The danger lies in the practice of distorting the stock market, which will hinder the growth of enterprises.
Since the beginning of the year, the number of terminated IPOs has reached a historical high. According to Wind data, as of March 27, there were a total of 82 IPO applications terminated in the first quarter, with 80 of them being voluntarily withdrawn, accounting for over 90%. In the meantime, only 26 companies have been listed on the A-share market this year, a 50% decrease compared to the same period last year.
In April, only 5 Chinese companies were listed on domestic exchanges, significantly lower than the 35 companies in April 2023. The funds raised in the IPO market in the first four months of 2024 decreased by 80% compared to the same period last year.
The chain reaction will move down the entire capital allocation chain. With IPOs becoming more difficult, it has also become harder for initial stock buyers to retrieve their funds. The sales of Chinese private equity investors plummeted from $89 billion in 2022 to $46 billion in 2023. The decline in valuations has made fundraising more challenging, leading investors to be more cautious about capital injection.
In 2023, approximately 358 billion yuan was raised through IPOs in the Chinese stock market. According to a report by PwC, this figure decreased compared to 2022.
Statistics from Securities Times show that as of May 31, a total of 38 companies have raised funds through IPOs this year, with a cumulative amount of 25.961 billion yuan.
It is evident that the fundraising in the first five months of this year did not even reach one-tenth of last year’s total. Guangdong resident Ren Yingying, a certified private fund manager, recently expressed concerns about this situation.
Economist Wu Jialong recently told Epoch Times that terminating IPOs means new funds will no longer enter the market. A significant shrinkage in initial funds signals a shortage of capital supply and a lack of investor confidence, causing a severe contraction in the capital market.
He explained that the most challenging aspect of the financial market is not data but confidence. Without confidence, funds will not flow in, and those already in the market may panic, worrying about finding buyers and considering exit strategies. This creates a vicious cycle.
This could lead to a crisis of capital outflows, putting pressure on foreign exchange reserves and further causing a loss of control in the yuan exchange rate, posing potential risks.
In 2024, 206 companies in China have terminated their IPO plans. These companies withdrew their IPO applications due to financial fraud and other violations. For example, the China Securities Regulatory Commission (CSRC) suspended 60 companies’ IPOs due to accounting fraud issues among other concerns. Many affected companies are emerging technology enterprises, mainly focused on areas such as chip manufacturing and robotics.
Ren Yingying mentioned that all 206 companies voluntarily withdrew their IPO applications. “Why did they voluntarily withdraw their application materials; they must have something to hide.”
Not long ago, listed company Jinzhou Port was discovered to have engaged in financial fraud for four consecutive years, amounting to a staggering 8.6 billion yuan. On June 3, the stock was suspended for a day, and after resuming trading on June 4, the stock was labeled ST, shocking nearly 100,000 shareholders.
From 2018 to 2021, Jinzhou Port and related companies inflated trade revenue, operating costs, and total profits, resulting in false reporting in annual reports during those years. The company was fined 80 million yuan.
Overseas Chinese economist Huang David told Epoch Times that the IPOs and fundraising in the Chinese stock market differ from international markets. They often involve listing through deception, hype, and inflated prospects.
He noted that after the pandemic, the stock markets of most global economies experienced favorable growth, with China being the exception. The continuous influx of IPOs into the market to cash out funds and deplete existing investments are significant factors for its underperformance.
“The overall investment capacity in China has decreased, whether it’s public funds, private funds, or individual investors. China’s financial situation as a whole is very poor. Exploiting the market relentlessly will exert significant negative pressure on the stock market and is unsustainable.”
Financial fraud is a persistent issue in the mainland capital market, seen in IPOs and refinancing stages where listed companies have committed fraud, including submitting false financial data during the declaration phase.
Since 2013, a total of 205 listed companies have been penalized for false or misleading disclosures.
Why is the CCP only “strictly supervising” now despite financial fraud being a persistent issue in the mainland capital market since long ago?
Huang David pointed out that a key issue in the Chinese stock market is unclear regulation, with most listed companies obtaining a “slaughter ticket” to manipulate the market for rent-seeking, financial fraud, and speculative trading.
He stated that the CCP is well aware of market malpractices, and professional organizations have previously conducted investigations on companies preparing to list, resulting in many companies withdrawing their listing applications.
“This indicates that possibly a significant proportion of the thousands of listed companies in China have financial fraud problems, exaggerating, misleading, and deceiving investors is a prevalent phenomenon.”
Huang David stated that although regulatory agencies exist in China, systemic issues and corruption prevail. Regulatory officials are often promoted based on connections rather than competence, leading to compromises arising from various interests. Many listed companies engage in high levels of financial statement fraud, sometimes actively participating in illicit gain-sharing with regulatory officials, perpetuating regulatory weaknesses.
He remarked that the Chinese stock market has been deteriorating for years, drawing criticism. To maintain political stability and economic development, the CCP finds the need to address certain officials; hence, they attempt “strict supervision” with the aim to boost the stock market. However, due to rent-seeking behavior and poor officer competence, the desired results may not be achievable.
“In the short to medium term, (strict control over IPOs) may have a certain impact on the stock market, preventing numerous fraudulent companies from listing. However, it fails to address the fundamental issues. In the long run, it does not resolve the underlying problems in the stock market,” Huang David remarked.
He also believed that Beijing has long sought to change the world’s economic order through securitization and the stock market.
The stock market reflects future economic trends. Wu Jialong stated that relations between the CCP and Western countries led by the United States are strained. Under these circumstances, the financial sector will be affected. The CCP faces challenges in employment, debt, and capital outflow. As foreign investments withdraw, the CCP realizes the ineffectiveness of market intervention.
“With China’s economic prospects being pessimistic and funds unable to enter or remain, the CCP’s efforts to buoy the stock market are futile, wasting time and energy.”