The planned resumption of new issues as early as June has put the rapidly recovering mainland stock market in a quandary.

Although analysts and investors believe that raising capital is the primary function of the stock market, they are worried that the rush to tap market funds after an eight-month suspension could short-circuit the current rally.

China's securities regulator last Friday released draft rules for listing and tweaked the system by revising the quotation system for new issues with a market-oriented price-setting mechanism, aimed at increasing the subscription chances for retail investors.

The China Securities Regulatory Commission said in a statement that the domestic stock market would resume its fund raising functions once the new rules are rolled out.

The Shanghai bourse yesterday fell 1.23 percent in the morning session before regaining its footing in late trading with the lead indicator edging up 0.48 percent to close at 2610.01 points.

"Concerns that the new offerings will divert funds from the secondary market are legitimate," Jing Ulrich, managing director of China Equities at JPMorgan, told China Daily, adding that the A-shares' pullback would come as no surprise given the sharpness of the market's latest surge.

The index has rebounded over 50 percent since last October to this Monday with a relatively high 20.6 multiple to earnings, while H-shares have clocked over 20 percent gains with around 14 times price/earnings ratio.

However, the key index dropped for three straight days last week after climbing to its nine-month high of 2676.68 points last Tuesday.

"News of the impending resumption of IPOs is taken as a signal by investors that the government will not continue to bolster the stock market as it is performing well since early this year," said Xu Wei, analyst, Guojin Securities.

According to figures from financial data provider Wind Info, 32 companies with 1.84 billion shares have been halted from floating new shares during the eight-month drought in mainland IPOs.

However, analysts said the listing reforms, would in the long run lead a healthier development of the market.

"The impending IPO resumption is a welcome development, considering the attention paid to market-oriented pricing and small investor participation," Ulrich said.

She said the new listings would not only broaden the investment options available for both retail and institutional investors, but also provide a much-needed additional source of funding for deserving companies.

"The guidelines will encourage more participation from retail investors, and also reduce the stocks' premium to the IPO price on the first trading day," said Wu Feng, analyst, TX Investment Consulting Co Ltd.

According to data compiled by Securities Times, the average premium rate, of 73 new stocks issued in 2008, to IPO prices reached 112.5 percent.

"Most investors chasing new shares are speculators, hoping to benefit from the huge price gap between the primary and secondary markets. The reforms will help the market run more rationally," said Xu.

"The liquidity concern is not such a big issue," Wu said. He estimated that the fund inflow would be 10 percent more than the market demand this year, even though new bank loans have seen declines in April.

The government has poured new loans of 4.58 trillion yuan in the first quarter, led by a record high of 1.89 trillion yuan in March, before dropping to 591.8 billion yuan in April.

Wu, however, feels the price-setting mechanism needs to be incorporated into the details on the primary market. He expects IPOs to re-start in August.

"In the early stages of implementing the IPO reform, we will keep a close eye on the market feedback and manage the pace, and steadily start on related work," the securities watchdog said in a statement.

(China Daily May 26, 2009)