More than 30,000 investors had thought they were very lucky to win the lottery draw when they subscribed for newly issued shares of Liaoning Chengda Biotechnology Co. Ltd. in its initial public offering (IPO).
They were terribly wrong. Chengda Biotechnology plunged nearly 25 percent on its debut on Shanghai Stock Exchange's STAR board Thursday, with each "lucky" investor losing about 14,000 yuan (US$2,186) on average on the debut day.
Chengda Biotechnology is among a string of new IPOs that have seen their stock prices slump when they debuted on the stock exchanges in Shenzhen and Shanghai. China's IPOs had been sure bet for investors in the past several years. The recent poor performance of newly listed stocks likely signals that this trend is coming to an end.
The IPO flops came as financial regulators stepped up supervision on pricing. The Shanghai and Shenzhen exchanges revised rules in September that included a change to how institutional investors place their bids. In a sense, the end of the trend that saw IPO as a surefire trade is a good thing as it can discourage highly speculative trading of newly listed shares. But for retail investors, it signals that the low-risk strategy may no longer be available.
For many small-time investors in China, IPO subscriptions have long been a way for them to score some profit to somehow make up for the losses they suffered in trading on the volatile secondary market.
China now has over 190 million people who have registered as stock investors. The stock market has enabled thousands of companies to raise much-needed capital and made company owners and pre-IPO investors billionaires overnight once their companies went public. But for many retail investors, the stock market could be a place, as some quipped, where you enter driving a Mercedes-Benz but come out riding a bicycle.
Regulators have been making it easier for companies to be listed on the stock market as a way to ease the financing difficulties of companies, especially tech startups, and boost the economy, leading to a surge in the numbers of IPOs in recent years. The number of IPOs on the Chinese mainland rose to 396 in 2020, surging 95 percent year on year, according to eastmoney.com. In the first half of this year, 247 companies went public, showing a continuing surge in the number of IPOs.
With hundreds of companies being listed on the stock market every year, tens of thousands of people strike gold when the companies they founded or invested in make it to the stock exchanges. They are able to offload their stocks once the lockup periods end, pocketing massive profits.
With China imposing no capital gains tax, those pre-IOP shareholders only need to pay 20 percent tax for individuals, or 25 percent tax for companies, on the profits made from selling their shares that were obtained when founding the companies or acquired before the IPOs, as compared to much higher rates for personal income tax, which can be as high as 45 percent for the portion of a person's yearly income that is in excess of 960,000 yuan.
If not properly regulated, the stock market could become a place where the efforts towards common prosperity are hampered. Company owners and pre-IPO shareholders offloading shares to retail investors at high valuation creates an unfair situation where a small group of people reap windfalls while large numbers of small-time investors burn their fingers, further exacerbating the wealth gap.
The market economy has made meritocracy widely accepted in China. But as Harvard philosophy professor Michael Sandel observed, the meritocratic way of thinking generates hubris among the "winners," by encouraging them to think that their success is all their own doing, and those "losers" have only themselves to blame. Meritocracy has metastasized into an obstacle to equality and sown the seeds of social discontent, according to Sandel.
Targeting the ultimate goal of common prosperity, we need to pay attention to the downside of meritocracy. Do company owners deserve all the windfalls from IPOs? Do retail investors have to blame only themselves because it is through their own volition they bought shares of high valuation? There should be a better system that provides a fairer game between company owners and retail investors.
Regulators have made great progress in recent years in bringing the once unruly market to order by lifting the requirements in information disclosure by listed companies and imposing deterring punishments on accounting fraud, insider trading and market manipulation.
However, more attention should be paid to equity.
In the early years of the Chinese stock market, regulators viewed the stock market as a way to revive financially strapped State-owned enterprises. In recent years, the stock market has been seen as a tool to boost tech innovation. Less attention has been paid to the interest of retail investors.
To make the taxation system fairer and serve the goal of common prosperity, higher tax rates are warranted for profits made from selling founders' stocks and other pre-IPO shares. Class actions should be encouraged for retail investors to seek redress when they lose money investing in companies that provide misleading and false information or untrue financial accounts. The rollout of IPOs should be slowed if there are signs the secondary market faces a liquidity crunch or performs badly because too many new listings have drained liquidity. More importantly, institutional arrangements should be made to introduce more long-term capital into the market, providing a stronger stabilizing force for the rapidly expanding stock market.
(The author is a deputy editor-in-chief of Shenzhen Daily.)