China Market Bubble Gets Much Worse

Print Email

The markets in China have gotten so out of hand that companies doing IPOs are upset it they do not get a 100% return on the first day out. The Shanghai Composite is up 120% this year, but the single day return hopes are a little out of hand.

Or are they. The average first-day return for Chinese IPOs in 2007 is 192%, according to data from Thomson Financial, according to The Wall Street Journal. Even China shares traded on US exchanges have gotten overpriced. Some small-caps traded on the AMEX and Nasdaq are up 300%. More well-known companies like Baidu (BIDU) and China Petroluem (SNP) has also logged tremendous gains. Over the last year, China Pet is up 120% to Exxon’s (XOM) 38%.

The big rise in Chinese IPOs signals two things. The first is that the market in China is overheated, perhaps to the point where a correction of 30% or more could occur at any time. The other is that investment banks taking Chinese companies public are doing their clients a disservice. If a stock doubles in the first day, a lot of money that might have been raised is left on the table.

The biggest problem with Chinese IPOs may not be how much they rise. It may be how much inefficient their investment bankers are in capitalizing on the demand.

Douglas A. McIntyre