Get set for a suckers' rally. On Monday, Guilin Sanjin Pharmaceutical, China's biggest producer of herbal lozenges, should rustle up the nation's first initial public offering since September. The resumption of festivities is long overdue. But more important is the regulatory overhaul that accompanies it. The stated aim is to shift closer to international norms, where institutional demand rather than the regulator sets stock prices.
In the past, underwriters' final call to discuss pricing was not to the issuer but to the China Securities Regulatory Commission. Almost all stocks debuted on a multiple of about 20 times forward earnings, regardless of actual demand. That caused absurdities such as PetroChina's IPO in November 2007, when underwriters received Rmb400bn ($50bn) of orders for a $9bn offering. Safe in the knowledge that shares would zoom on launch – PetroChina rose almost 200 per cent on its first day – investors simply sold old holdings to load up on new ones or borrowed cash to fill their boots with stock.
While markets were going up, distortions such as these were ignored. But when the index toppled – Shanghai fell 60 per cent in the first eight months of last year – they suddenly mattered more.