China Stocks Face $722 Billion Overhang as Share Lockups End

More than $722 billion worth of Chinese stocks will be unlocked for sale next year, testing a market where valuations are at a five-year high.

That would be the largest amount since at least 2011, according to China Merchants Securities Co. It’s also equivalent to about 7% of the value of the entire Chinese equity market, data compiled by Bloomberg show.

From initial public offerings to additional placements, China’s cash-hungry companies have been encouraged by Beijing to raise funds by selling new shares. There has also been a rush of additional sales by firms looking to avoid the turmoil in the nation’s debt market. As a result, the number of restricted shares held by major shareholders, senior executives and early investors is swelling, driven by Beijing’s market reforms and looser regulations.

Three companies saw their stocks fall on Wednesday after announcing equity sale plans by holders. Shanghai’s Star market, which is set to see high volume of new stock unlocks next year, led declines in Chinese equities. A gauge tracking it closed down 2.4% to the lowest in more than six weeks.

China Stocks Face $722 Billion Overhang as Share Lockups End

“More companies are going to issue shares to raise funds, especially after the rising default problems in the credit market,” said Capital Securities Corp. analyst Amy Lin. “That means more restricted shares being unlocked in the future, which will be an issue affecting the market for a long time.”

China Stocks Face $722 Billion Overhang as Share Lockups End

In China, restricted stocks usually have a lockup period of anything between six months and three years after the date of listing. And when unleashed for company insiders to sell, the rest of the market can feel the impact. A gauge tracking the Star market fell 8.2% in the three trading days after its one-year anniversary in July, when company insiders took their first chance to sell. That dragged the country’s benchmark CSI 300 Index down by 4% during the same period.

Next year will see a concentration of unlocks in the second and third quarters, according to a recent Industrial Securities Co. research note. Companies in electronics, medicine and biotechnology, and brokerage industries face the highest value of unlocks next year, according to China International Capital Corp., which said in a note that it expects a large amount of shares freed up on the main board in June and on the Star board in July.

Chinese companies have raised 438 billion yuan ($67 billion) from A-share IPOs this year, the highest level since 2010, according to Bloomberg-compiled data. This year the volume of private share placements hit the highest level since 2017.

The five companies facing the largest amount of unlocks next year are Contemporary Amperex Technology Co., Shenzhen Mindray Bio-Medical Electronics Co., Foxconn Industrial Internet Co., CSC Financial Co. and People’s Insurance Co. Group of China Ltd., with at least 198 billion yuan of shares to be unlocked each, CICC says.

To be sure, while the market faces growing pressure from unlocks and insider selling, analysts believe a positive outlook for China’s stock market next year could partly offset the impact, especially as the economy continues its recovery from the virus pandemic. Analysts at China Merchants Securities expect more than 1 trillion yuan of funds to flow into A shares via mutual funds and overseas investors.

But the release of more previously restricted shares will still pressure the market, said Li Shuwei, chairman at Beijing WanDeFu Investment Management Co. “I would be wary of investing in stocks with high valuations and high proportions of shares waiting to be unlocked,” he said.

©2020 Bloomberg L.P.

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