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China’s red-hot initial public offering (IPO) season is spooking the financial world. A deluge of new offerings and eye-popping post-listing performance has created frenzy among investors. Analysts are worried that the mega-floats in China will create a liquidity crunch in other markets like India as it may spark foreign investor redemptions.
Following are the five reasons, the Chinese IPO boom will make little dent in India:
1) Size matters
In the first four months of the year, equity fund raising in China has topped a whopping $90 billion. And IPOs worth another $200 billion are expected to hit the market soon. The total foreign investor holding in Indian stocks is a little over $300 billion. So, divesting from Indian stocks is likely to provide little liquidity for foreigners to participate in new offerings in China.
2) No sell-off yet
The Chinese IPO boom is going on for some months now. However, we haven’t seen any large-scale FII selling yet. So far this calendar, FIIs have invested over $6.6 billion into Indian stocks. In the past fortnight, FIIs have taken out close to $2 billion, however, these can be attributed to factors like global risk aversion, retrospective tax concerns and disappointing corporate earnings.
3) IPOs weighing on local market
China IPOs are weighing on their home market more than any other market. For instance, the benchmark Shanghai Composite Index, which was up nearly 35 per cent during the year, has come off by more than 10 per cent from its highs. Analysts say investors are selling shares in listed firms and redeploying it in the IPO market which is putting pressure on the Chinese domestic market.
4) Bubble building
Almost all the IPOs in Shanghai and Shenzhen have seen huge jump after listing. So much that it has got investors worried that it could be a symptom of a bubble building. So typically hot money could flow into Chinese IPOs. Long-only funds and sticky investors are unlikely to be enthused by the IPO scene in China, unless it is a marquee float like last year’s Alibaba. More importantly, bulk participants in the IPO market in China are local investors.
5) Rebalancing could taper India flows
Although one can built a case that large portion of the capital may not directly flow out of Indian shares into Chinese IPOs, that doesn’t mean money will not flow out of India into China. The Chinese market has been one of the best-performing markets in 2015. Interestingly, during the start of the year, lot of foreign funds were underweight China and overweight India. Given China’s outperformance and India’s underperformance, lot of global fund managers are rejigging their portfolios in favour of China. As a result of this lot of passive flows going ahead will go into the Chinese stocks, while Indian portfolio investment could taper.
