China Losing Out With Underpriced IPOs

China could have $9.5 billion more if IPO prices had been as high as the market price on the first day of listing.

The Chinese state is consistently missing out on billions of dollars of potential revenue because it sells companies at far less than what the market thinks they are worth, the World Bank said May 30. The initial public offerings of state enterprises so far this year could have earned government coffers $9.5 billion more if the IPO prices had been as high as the market price on the first day of listing, the bank said.

"After the IPO, on the day those stocks get listed, very often there is a big increase in prices," Bert Hofman, a bank's lead economist for China, said as it released its quarterly update on the Chinese economy. "Even though many people see this as a success... it actually means if it is state property, that the government could have made a lot more money from the IPO, but it didn't."

Moderate underpricing is a good idea, because it can encourage share ownership in the public, and even in more severe forms it is usually private company owners that lose out, but China is different, Hofman argued. "In China it's the state very often that is selling companies through IPOs, so it's state property. And the state should therefore for its own revenues be more worried about that."

There is no consensus on why underpricing takes place, but some economists argue it is an unavoidable consequences of lack of information about the market, he said. Others see it as a result of the shortcomings of the current price-setting mechanism dominated by investment bankers, he said.

Copyright Agence France-Presse, 2007

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