1. New stock listings on Chinese mainland exchanges have delivered impressive first-day gains, but these spectacular debuts are increasingly followed by sharp price declines, raising questions about whether these IPOs reflect a balanced market or are being influenced by structural imbalances. [para. 1]
2. Recent examples illustrate the trend: Shanghai Enflame Technology Co. Ltd., a domestic AI chipmaker, surged 179% from its IPO price to close near 400 yuan ($60) on Sept. 11, while robotics company Unitree Robotics jumped 460% on its first trading day three weeks earlier. [para. 2]
3. The phenomenon is widespread. As of Sept. 15, none of the 113 stocks newly listed on the mainland this year had fallen below their IPO prices on debut, with an average gain of 263%, according to Wind Information data. In the prior year, all 116 new stocks also rose on day one, averaging a 259% gain. [para. 3]
4. However, these gains are frequently short-lived. The proportion of newly listed stocks that declined on their second trading day has risen steadily: from 65.5% in 2023 to 70% in 2024, 72.4% last year, and 74.3% this year as of mid-September, according to Caixin calculations. [para. 4]
5. A key reason behind this pattern is the relatively small number of shares actually available for trading when a stock debuts. [para. 5]
6. For example, Enflame issued 43 million shares, equivalent to 10% of its total shares outstanding after the IPO. But due to strategic allocations and lockup arrangements, only about 18 million shares—roughly 4% of the company's total shares outstanding—were unrestricted on its first trading day. [para. 6]
7. The imbalance was further amplified by margin financing. Enflame attracted 1.1 billion yuan of margin buying on its debut, accounting for 19% of trading volume, while short selling was completely unavailable. [para. 7]
8. This created a one-sided market dynamic: investors who expected the stock to rise could borrow money to increase their positions, but those who believed the price was excessive generally could not borrow shares to express that view. [para. 8]
9. Many of this year's new stocks have listed on Shanghai's STAR Market, which was explicitly designed to give buyers and sellers more room to establish an equilibrium price. STAR Market stocks face no price limits during their first five trading days and are eligible for margin trading from day one, a feature the Shanghai Stock Exchange said was intended to improve market pricing efficiency and address the "one-sided market" problem. [para. 9][para. 10]
10. However, the imbalance between long and short trading capacity has become more pronounced following a series of regulatory measures since 2023 that sharply reduced securities lending. The China Securities Regulatory Commission tightened lending rules in October 2023 after controversy over strategic investors lending restricted shares for short selling, then suspended lending of restricted shares in January 2024, with further measures following. [para. 11][para. 12]
11. By the end of 2024, the ratio of margin-financing balances to securities-lending balances stood at 178:1, up from 153:1 at the end of the previous year. [para. 13]
12. Zheng Zhenlong, director of the securities research center at Xiamen University, noted that a normal market requires both buyers and sellers, but restrictions on short selling mean investors who consider a stock overpriced cannot fully express that view through trading. [para. 14]
13. Some academics and market participants argue the imbalance could be eased by expanding the supply of securities available for lending and increasing the number of shares available for trading when companies list. However, a quantitative private equity manager pointed out that even in Hong Kong and the U.S., shares available to borrow shortly after an IPO can be limited and borrowing costs high, while short selling also carries risks such as short squeezes. [para. 15][para. 16]
14. Notably, Hong Kong introduced a separate free-float requirement last year, requiring newly listed companies to meet a minimum free-float threshold in addition to its public-float requirement. While the mainland market differs from Hong Kong's, this approach could offer a reference for mainland regulators seeking to address the pricing imbalance. [para. 17]
AI generated, for reference only
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