China's perfect Storm breaks

This column's favourite stock for the past month has been Beijing Baofeng Technology, which offers online videos in China. Baofeng means "storm", and it has been a near-perfect performer: its shares traded limit-up every day from its March IPO in Shenzhen apart from one, and opened up the maximum 10 per cent on Thursday, too.

It looks like the storm has now broken. Its shares ended the day down for the first time, falling 4.4 per cent after news of a copyright dispute over content. There is no need to feel too sorry, with the stock up 3,285 per cent from the offer price. The chairman is now a dollar billionaire on paper, according to Bloomberg calculations.

While Baofeng was the most extreme example of IPO froth, there is little sign that the bubble in China's domestic flotations has popped.

One in 12, or 129, stocks listed in Shenzhen rose by the daily limit on Thursday, including the day's crop of three IPOs, all up by the first-day maximum of 44 per cent. Those who miss the certainty of Baofeng's 10 per cent daily gains can find the same illusory comfort from the record of plenty of others listed since it joined the market: more than half have risen by the daily limit each day.

The longest-standing have managed 16 trading days of unbroken maximum gains, for a sixfold price rise. If this is due to underpricing flotations, lots of Chinese bankers should be fired for misjudging the market entirely (though regulatory pressure to avoid high valuations for new listings may continue, even though formal caps have gone).

Given this performance, it is easy to see why punters want access to IPOs. But the market will eventually balance, as demand creates its own supply. The quality of IPOs will fall, and may already be doing so: companies which planned but failed to list for years are finally floating. The number of IPOs has leapt this year, too.

Rationalising China's soaraway market is hard, and probably pointless. One possibility is that buyers hope to sell overpriced shares to foreigners once China enters global benchmarks. This could explain higher valuations for big stocks, but it is hard to see how small IPOs benefit.

Indiscriminate demand always ends badly eventually. But for now IPOs roar ahead, with or without Baofeng.

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