Shanghai Composite plunged 200 points overnight. The surge of secondary offerings by A-share listed companies put increasing pressures on already exhaust market. The releasing of unlocked non-tradable shares further diluted the market value. The CNY 16.85billion public offering of China Metallurgical on Monday was one of the straws breaking the camel's back.
New share Offerings
The data by WIND showed that A-share listed companies had raised a total of CNY 61.44 billion by August 27, 42 of them through private placements and 2 through public offerings. After Shanghai Composite reached its 14-month high, the listed companies, leading by the bank and real estates sectors, flooded the market with aggressive second or third public offering requests. Poly Real Estate planned CNY 40billion new share offerings while Vanke and China Merchants Banks asked for additional CNY 10billions respectively.
The security reform in 2004 allowed the listed companies to release their non-tradable shares after certain time period. The flooded injection of those unlocked non-tradable shares into the market was contributed as one of major factors that caused the collapse of China stock market from 2007 highs.
The number of unlocked shares was 111.8billion shares in the first half of 2009. However, there were 555.8billion non-trade shares ready to unlock in the second half of 2009. A lion share of them will be released in October, that is, 332 billion shares will be allowed into circulation with the total market value of CNY 1.89trillion.
Oct.'s unlocked shares will concertrated on the heavy weights, such as Sinopec (NYSE:SNP) and Industrial and Commercial Bank of China (ICBC). ICBC will be allowed to release 236billion shares on Oct. 27 and 19billion shares on Oct. 20, which is equivalent to 77% of its current market value. SNP will release 57billion shares, 66% of its current market value.
Although these unlocked non-trable shares will not immediately be sold into the market, it will certainly put a downward pressure on the market. They were negatively correlated with the stock prices and exacerbated the price movement, that is, the stock with recently unlocked non-tradable shares tended to decline more than the rest groups in a down market. However, it also experienced a stronger rebound afterwards.
The data from China Securities Depository and Clearing Co. showed an increasing willingness to unload the unlocked non-tradable shares into the market. 9.8% of the non-tradable shares were sold in June, verse only 4.2% in May.
New share offerings schemes by A-shares listed companies, via public or private tranches, shot up after the recent run-up of Chinese stock market. The increasing share offerings will mopped up the excess liquidity caused by the ultra-loose monetary policy. The high equity position by various funds in China had shown the deteriorated liquidity provisions. In additional, the onslaught of the unlocked nontradable shares further upset the imbalance of the supply and demand of stock market. All those excess supply of the floating shares, coupling with tightening monetary policy, painted a bleak picture of Chinese stock market in short term.
disclosure: long FXP