(China Daily)
Updated: 2007-07-25 15:47

An increased supply of new shares can help dampen investor exuberance. But to boost the long-term development of the stock market, authorities must consider carefully not only the speed of initial public offerings (IPOs) but also the way in which they are sold.

A strong IPO pipeline forecast for the rest of the year now appears certain.

It has been reported that large Chinese companies that are already listed on overseas markets will likely raise 250 billion yuan ($33 billion) once they issue A-shares to domestic investors.

In addition, China listed companies will float once non-tradable State shares worth hundreds of billions of yuan, while many other Chinese companies are also trying to tap the A-share market to raise funds.

In the second half of the year, the stock market is expected to raise up to 1.1 trillion yuan in new funds. The impact of this increase on supply could be huge.

On one hand, it could also help slow the rally of Chinese shares.

The stock market has grown about 60 percent so far this year, following a 130 percent rise in 2006. As the country's economic growth accelerated to 11.9 percent in the second quarter and price inflation jumped by 4.4 percent last month, it is urgent for policymakers to stop the market creating asset bubbles.

A key reason behind the unprecedented rally of domestic shares is excess liquidity. Now, the return of a number of large overseas listed Chinese companies will not only mop up this liquidity, but also provide investors with more choice.

On the other hand, the process will increase the depth of the domestic stock market and help eliminate the huge valuation distortions between it and the rest of the world.

The domestic market has already been expediting its IPO processes. Simply by adjusting the speed of new IPOs, the regulators might be able to rein in domestic shares if only temporarily.

But the long-term problem with domestic IPOs is that, in practice, they are usually priced at such a chunky discount that they encourage blind subscription and later benefit only a few institutional investors with large funds, rather than lots of smaller, individual investors.

A new process for IPO issues that reflects the real risks associated with new shares and ensures fair treatment for all sorts of investors is crucial to the sound development of the stock market in the long term.