THE China Securities Regulatory Commission (CSRC) desperately wants the resumption of initial public offerings (IPOs) to inspire investors to return to the long ailing stock market.

    Unfortunately, that goal stands in direct opposition to efforts by the central bank to tighten monetary conditions as it tries to restrain risky shadow banking activity.

    The CSRC may permit as many as 500 firms to launch IPOs this year, with some estimating that they will raise as much as 200 billion yuan (US$33.09 billion).

    But as the People’s Bank of China continues tightening liquidity, equities analysts and money dealers are asking where all this new cash is going to come from.

    “Without money, nothing is possible,” said Chen Huiqin, senior analyst at Huatai Securities in Nanjing.

    Many equities investors have opposed the resumption of IPOs, arguing that new listings can only dilute the net market valuations, causing indices to slide.

    Worse, some money dealers fear large IPOs will lock up considerable amounts of cash, adding to strains in China’s money markets and possibly provoking more dramatic spikes in short-term interest rates which could drag on the broader economy. That would tend to push down domestic stocks, putting a rally even further out of reach — a sort of vicious cycle.

    “China’s stock market is still largely liquidity-driven,” said Cao Xuefeng, head of research at Huaxi Securities in Chengdu. “So unless liquidity conditions improve significantly, there cannot be a reverse of fortune for stocks.”

    In the past, huge inflows driven by infrastructure spending by the government and overseas investment helped push the CSI300 Index to a record high in 2007 and set off another, lesser rally in 2009.

    But those days are long gone. The CSI300 is down around 60 percent from its 2007 peak, and economists believe China’s economy is entering a new era of higher interest rates as regulators move to mop up the sloppy liquidity that has supported stratospheric prices for housing, massive industrial overcapacity, and mired local governments and firms in debt.

    Many investors saw another bull run on the horizon in November, when Chinese leaders announced the boldest economic and financial reform plans in decades, including stock market-boosting initiatives.

    The news set off a micro-rally between late November and early December, which may have encouraged the CSRC to make the surprising announcement that the time was ripe to allow the resumption of IPOs, which had been suspended for over a year.

    Unfortunately, markets did not applaud the decision, and started a precipitous decline Dec. 5 that has seen the CSI300 shed over 12 percent so far.

    The reaction highlights the government’s conundrum; for the stock market to rally, new money has to flow into it, but money in China is now a very expensive commodity.

    The government has rallied its forces to talk up the market.

    “IPOs are not poison,” said the People’s Daily in a rare official commentary Jan. 9, arguing against an opinion popular among retail investors that IPOs are inherently dilutive.

    Other regulators have suggested they will guide more State money into equities, while “encouraging” already listed State-owned giants to buy back shares.

    Other analysts pointed to new policies allowing brokerages to offer retail investors margin accounts, which could theoretically allow more money into the market, facilitated by the implementation of new hedging tools and derivative projects allowing them to reduce their net risk exposure. (SD-Agencies)