For the past two decades, initial public offerings on the Chinese mainland were the darlings of retail investors as new listings usually skyrocketed on their market debuts, helping successful subscribers easily reap hefty gains.
The strong first-day performances came even amid extremely high valuations - investors were clearly willing to buy in regardless of corporate fundamentals.
But the situation has changed somewhat in 2011. In the first three weeks of the year, 21 new stocks began trading in Shanghai or Shenzhen, but already 15 of them have dropped below their IPO prices -a rarity in the still short history of China's stock markets
One explanation for this change is the tightened monetary situation. Beijing has been raising commercial bank's reserve requirement ratios, restricting the proportion of total assets that can be lent out. This is intended to drain the economy of excess money and tame rising prices. It could also be affecting the cash flows of major institutions, whose reticence in the market passes through to individual investors.
While this may have had an impact, the problem relates to the pricing of these newly-listed equities. Most of the IPOs so far in 2011 have been on Shenzhen's two growth boards, where the average price-to-earnings ratio is over 60, more than double the market level. Is it any surprise that these stocks end up in a slump?
The simple fact is that the IPO pricing system offers far too much power to issuers, underwriters and cornerstone institutional investors. In many cases, the number of shares offered is so small proportional to market demand that massive oversubscriptions are inevitable. The institutional investors get in early and get out quickly, leaving retail investors who participate in the secondary market high and dry.
Given the tighter monetary conditions, institutions are no longer in a position to force up the prices of a range of new stocks, and this goes some way to explaining the recent poor debut-day performances.
At the same time, retail investors are getting sick of volatile IPO pricing. A survey conducted by Hexun.com, China's biggest business news website, found that 64% of respondents don't plan on subscribing for future listings. When asked why, 27% said it was because IPO prices were inflated and 19% blamed excessively high P/E ratios. Either way, they are less willing to pay for assets they believe to be overvalued.
Tracing the problem to its root cause, it is important to note that many Chinese companies still regard the equity market only as a place to raise capital. Once they are listed they care little for investors' interests - offering meager dividends and being slow in disclosing information to the market.
With this in mind, it was interesting to see the recent war of words between Li Guoqing, CEO of China Dangdang, a recently listed Chinese e-commerce company, and its IPO underwriter, Morgan Stanley. Dangdang sold 17 million American depository receipts at US$16 each to raise US$1.1 billion. Li insisted that the issue should have easily collected US$2 billion but Morgan Stanley deliberately lowered the IPO price to ensure its success.
I never heard of a case in the A-share market where the underwriters have been accused of pricing too low.
Issuers, underwriters and institutions work together to ensure stunning first-day gain for new listings in China's domestic market. The victims of these unfair practices - which usually go unpunished - are retail investors.
The regulators have introduced various measures to try and tackle these problems. It may be that we will now see new listing rules or a temporary suspension in IPO approvals if too many new stocks fall below their offering prices on debut. This would hardly be a surprise - China's securities regulator has halted approvals seven times in the past 20 years.
But would another change in the rules have much effect?
