IPO price policies handicap domestic investors

PetroChina Co Ltd, the listed arm of China National Petroleum Corporation (CNPC), paid out $11.9 billion in dividends to holders of its US-traded shares since its IPO in New York in 2000, a sum more than four times higher than the overall funding amount the company received and much higher than what it paid out to its shareholders in the mainland market, local media reported recently.

CNPC though is not the only enterprise which has provided more to its offshore investors than those on the mainland.

Investors who purchased shares of CNPC, China Mobile, China Unicom and China Petrochemical Corporation at overseas markets have achieved average annual investment returns of roughly 130 percent over the last four years, far more than the marginal gains mainland investors reaped over the same period from these firms.

This problem, which has disadvantaged so many Chinese mainland investors and has long been undermining sentiment in local stocks, is primarily attributable to the mainland's nascent IPO price system. 

Companies in the mainland IPO pipeline are supposed to set prices on their shares based in part on suggestions from their pre-sales cornerstone investors, which may include large institutional investors such as securities firms, insurers and fund management companies.

Yet, unlike most mature equities markets, there is still a lack of strong information disclosure procedures when it comes to the pricing of new shares in the mainland market. This has opened the door for large-scale investors to collude with firms that are looking to get listed to intentionally overestimate the prices of the latter's IPO shares. Such relationships are usually used to satisfy the listing firms' appetite for funding.

In other words, IPO prices of mainland-listed companies may not necessarily reflect their actual business performances, and the hype which drives up prices on these shares leaves little room for investors to benefit.

Actually, as many as two thirds of the 288 firms which debuted at mainland bourses last year saw their share prices fall below their IPO valuation in their first day of public trading, according to recent statements from Guo Shuqing, chairman of the China Securities Regulatory Commission.