Chinese cost of capital drops, Chinese companies de-lever, everyone gets richer, and Bloomberg thinks it’s bad news
Chinese equity valuations have doubled since June, with the trailing P/E ratio of the Shanghai Composite up to 20X from 10X just eight months ago. The forward P/E has risen to 16X earnings from 8X earnings. That means that the cost of new equity capital for Chinese companies has fallen by about half. The IPO market in Greater China is booming, as Ernst and Young comment in their Q1 report on the global IPO market:
Despite the ongoing slowdown in growth, reduced retail activity and concerns about inflation and the property market, it was a relatively strong start to the year for IPO activity in Greater China as financial markets continued to liberalize. IPO deal numbers were up against 4Q14 and 1Q14, although capital raised was lower. In 1Q15, 94 IPOs raised US$9.2 billion Greater China exchanges, up 29% by deal number but down 21% by capital raised compared with1Q14.
Greater China exchanges accounted for 37% of global IPOs by number of deals, and 24% by capital raised. Hong Kong had a slower start with 14 companies raising US$1.2b. The Shenzhen and Shanghai exchanges topped the global listing for deal numbers, while the Shanghai Exchange led by capital raised. China IPOs rising Amid reports that Chinese growth is slowing, the Chinese Government has issued a series of monetary policies, including the lowering of interest rates and RMB reserve-requirement ratio (RRR) in order to balance stability with improved growth and market liquidity. Against this backdrop, the rate of new IPOs coming to market in Greater China accelerated in 1Q15 as the regulator sped up IPO approvals, although the impact was somewhat offset by the impact of the late Chinese New Year, which caused a temporary slowdown in activity.
Sounds like the cup of capital runneth over in China. Some think the cup is half-empty, though. Then there’s Bloomberg News, which thinks that the cup is half-poisoned. “Companies raised 205 billion yuan from domestic investors through IPOs in China in the first two months of the year, double the same period of 2014, according to the China Securities Regulatory Commission. Bond issuance rose just 7 percent to 581.6 billion yuan, data from the China Bond website show,” Bloomberg observed in a commentary entitled “China Stock Jump Blows Up Bond Yields in Threat to PBOC.” Bond yields are rising because investors would rather buy stocks than bonds, and companies would rather raise equity capital than debt.
In other words: the OVERALL cost of capital for Chinese companies is falling (because the cost of equity capital has come down by half while bond yields have risen a bit); Chinese companies are de-levering (by replacing debt with equity at the margin); and everyone is richer. Bloomberg thinks this is a problem. Well, you can’t please everybody.
China’s real interest rates are much higher than its peers (around 4% in China vs. negative real interest rates in most of the world’s big economies), but the People’s Bank of China has plenty of room to reduce interest rates going forward.
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