IPOs in mainland China face drag from tighter regulation, tepid economic growth

Initial public offering activity on mainland China's stock exchanges is likely to remain tepid after falling three quarters in a row amid weaker sentiment and tighter regulation.

Issuers raised an aggregate of $2.96 billion in 23 IPOs in the January-to-March quarter on the Shanghai Stock Exchange and Shenzhen Stock Exchange, the two main listing venues in mainland China, according to S&P Global Market Intelligence data. The amount raised was 73% lower than the $11.13 billion a year earlier, while the number of deals was the lowest since at least the first quarter of 2019, the data shows.

"The heightened scrutiny over new company listings applicants and quality of issuers in the A-share market has resulted in a drop of both number and proceeds raised across all five markets (in mainland China)," said Dick Kay, offering services leader at Deloitte China's capital market services group. This will likely result in fewer IPOs in 2024 overall, Kay said.

The first quarter is typically a dull period for IPOs in mainland China as companies prepare their growth and investment plans for the year. Expectations of slower economic growth than in pre-COVID years and a property market slowdown are dragging on the world's second-biggest economy. GDP grew 5.3% in the first quarter, tracking higher than the full-year aim of around 5%. The economy expanded 5.2% in 2023, beating a similar target. The benchmark CSI 300 stock index is still 37% below its 2021 peak, even after recovering 18% from its recent low of 3,108 in February.

The China Securities Regulatory Commission announced new rules in March that seek to improve the quality of new listings and enhance the responsibilities of sponsors and exchanges. That followed another set of rules in August 2023 that slowed down the pace of new listings.

The newly released measures "will help further enhance the quality of issuers and eventually the quality of A-share stock market," said Tong Tang, A-share offering leader at Deloitte, but "it is unavoidable that the listing pace would be affected for the time being."

The consulting firm now expects 115 to 155 new listings in the A-share market, to raise between 139 billion yuan and 166 billion yuan in 2024. That is a downgrade to its prior forecast of 260 to 330 deals to raise as much as 317 billion yuan across the two main boards in Shanghai and Shenzhen, plus ChiNext, the Nasdaq-style subsidiary of the Shenzhen Stock Exchange, the science and technology-focused SSE STAR Market, and the Beijing Stock Exchange.

The Shanghai Stock Exchange, often among the top three bourses in the global league table of IPO fundraising, ranked fifth in the first quarter, behind NYSE Holdings LLC, Nasdaq Inc., Six Swiss Exchange Ltd..and National Stock Exchange of India Ltd., according to Deloitte. The Shenzhen Stock Exchange took seventh place and Hong Kong Exchanges and Clearing Ltd. (HKEX) came 10th.

Hong Kong IPOs tepid

IPO activity in Hong Kong was also tepid in the first quarter, though the exchange operator said its pipeline of new listings remains healthy. There were 85 active IPO applicants as of the end of March, the bourse said in its first-quarter earnings report, compared to 92 a year earlier.

"We continue to see a growing pipeline of midsized companies seeking a listing in Hong Kong," law firm White & Case said in a client note in April.

Despite subdued valuations, many of these companies remain confident in the international status and global expansion opportunities offered by a listing on the Hong Kong Stock Exchange, and this is particularly appealing to mainland China enterprises seeking to "go out" and expand internationally, it said.

None of the global top 10 new listings in terms of proceeds in the 2024 first quarter came from mainland China, compared with four in 2023, according to Deloitte.

Globally, companies raised a total of $23.33 billion in IPOs during the first quarter, a decline of 3.4% year over year, according to Market Intelligence data. The number of IPO deals fell 13.7% to 296.

As of May 13, US$1 was equivalent to 7.23 Chinese yuan.