No Struggle In China IPO Market

The local stimulus package may be causing a bubble in the Chinese stock market. Investors may simply have unprecedented access to capital. The market may also be reacting well to the fact the GDP moved up more than 7% in the second quarter or that the recession in the West is not as bad as it was earlier in the year. That would cause improvement in China’s exports as the year moves on.

Whatever the reason might be, China State Construction Engineering Corp was able to sell 12 billion shares and bring in $7.3 billion in the largest IPO anywhere in the world in 2009. It is, as a matter of fact, the largest IPO in the world since March 2008. Even small companies face trouble as they try to capital in the public markets inside the US.

The success of the China State Construction may be fleeting. Construction spending in the world’s most populous nation is likely to be strong this year and next because so much of China’s $585 billion stimulus package has gone to infrastructure investment. Export growth, the engine of GDP on the mainland, could stall if the recession in the US, UK, Japan, and EU does not improve sharply by the end of the year.

The stock market index in Shanghai is up almost 75% this year, but it is worth remembering that it fell from 5,800 in late 2007 to under 1,730 in October 2008. The stock market in China may be more sensitive to fluctuations in the economy. Recent evidence would support that.

China may be able to take advantage of the run-up in the market and get several most IPOs done this year. Next year may be an entirely different story if the global economy does not start to expand and expand fairly rapidly.

Douglas A. McIntyre