China Stock Market Finally Helping Firms Battle Cash Crunch

(Bloomberg) --

China’s cash-strapped companies are counting on the equity market for more funding, about three years after the government kicked off its clampdown on financial leverage.

Firms have this year raised a combined 555 billion yuan ($79 billion) through the sale of shares and equity-like securities, up 9.4% year-on-year, according to Bloomberg-compiled data as of Oct. 31. Upcoming stock issuance -- including what may be China’s largest listing since 2015 -- means the tally is well on course to exceed last year’s total. It would mark the first annual increase since 2016.

After a cash crunch last year, China’s securities regulator has relaxed rules to ease the funding challenges faced by local firms. With less than one-quarter of 2018’s $2.9 trillion of financing coming from bond and equity issuance, ensuring the country’s capital markets play a bigger role has been a priority for Beijing.

“The government has sent a clear message that it is determined to develop equity financing,” said Jiang Liangqing, a money manager at Ruisen Capital Management in Beijing. “Making equity financing play an increasingly larger role will mitigate corporate-debt burdens and reduce their funding pressure.”

Authorities have this year unveiled a series of initiatives aimed at encouraging equity sales, a push that accelerated after China named a new securities chief in January. Measures include a venue in Shanghai that features fewer pricing and trading restrictions, a revamp of China’s largest over-the-counter stock exchange and a policy allowing backdoor listings on the ChiNext board for certain companies.

Yi Huiman, chairman of the China Securities Regulatory Commission, said Sunday that some of the Star board initiatives will be rolled out to the ChiNext board.

A bull market in stocks has also helped. Chinese shares lost $2.3 trillion last year, the world’s biggest wipeout of shareholder wealth, as a worsening economy, the U.S.-China trade war and Beijing’s deleveraging drive combined to undermine confidence. The Shanghai Composite Index has recovered 19% in 2019.

The response from investors has also been positive: the Star board opened to much fanfare when the first batch of 25 companies started trading in July, with stocks surging an average 140% that day. A string of new offerings also triggered a frenzy in the country’s convertible bond market, with deals oversubscribed hundreds -- and sometimes thousands -- of times.

Momentum remains strong for the final quarter. Postal Savings Bank of China Co. will price its Shanghai listing Tuesday, in what is widely expected to be the onshore market’s biggest initial public offering since the stock bubble burst in 2015. ZTE Corp. received regulatory approval in October for a private share placement of as much as 13 billion yuan.

Stock issuance is still tiny compared to credit, which stands at a record 9.8 trillion yuan so far this year.

While equity-financing tools are moving in the right direction, analysts say there’s more work to be done to encourage their use. But authorities may be wary of excessive stock supply -- which risks endangering the broader market -- or measures that may encourage speculative behavior. In March, the CSRC limited subscriptions for convertible bonds to one account per investor after the deals became too popular.

“Equity financing should be a core function of the capital market,” said Zhang Aoping, managing director at Real Capital. “We would like to see more regulatory innovations to follow suit, such as in the areas of private share placement and convertible bonds.”

--With assistance from Tongjian Dong and Irene Huang.

To contact Bloomberg News staff for this story: Ken Wang in Beijing at ywang1690@bloomberg.net;Mengchen Lu in Shanghai at mlu157@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Fran Wang

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With assistance from Bloomberg