China using big equity offers to cool market

SHANGHAI, Jan 21 (Reuters) - The announcements of three big equity offers in China, including a monster $20 billion cash call by the country's second biggest life insurer, may signal a new determination by the government to cool the stock market.
News of the offers, as well as tumbling share prices in Hong Kong and other global markets, sent China's main stock index plunging 5.1 percent to a one-month low on Monday.
The main trigger was Ping An Insurance (Group) Co, which said at the weekend that it would sell as many as 1.2 billion new local shares and up to 41.2 billion yuan ($5.7 billion) of convertible bonds with warrants.
Based on Ping An's closing stock price of 88.39 yuan on Monday, the sale could in total raise almost 150 billion yuan -- by far the largest equity financing in China's domestic market.
"The government has found the weapon to cool the market -- supply," said Ren Chengde, senior analyst at Galaxy Securities.
"It may not hope the stock market will fall so much that it becomes undervalued. But it does want to squeeze out the part of the stock bubble caused by China's excess liquidity."
The Shanghai market almost doubled in 2007 after rising about 130 percent the previous year.
The government's desire to cool the market may be fuelled by signs that consumer price inflation is not coming down as fast as hoped from November's 11-year high of 6.9 percent.
Official sources said December inflation, expected to be formally revealed this week, was 6.5 percent. But rising food prices have many analysts predicting a new high in January.
The government showed its alarm last week by placing price curbs on a range of basic foods, its heaviest such intervention in over a decade. While food is the main source of inflation, officials have said surging asset prices may be contributing.
When it felt the stock market's bull run was getting out of hand in May last year, the government hiked the trading tax. But that was met by a public outcry as the market fell 20 percent in a week, exposing the government to accusations that it was hurting small investors.
By using fresh supplies of shares instead of direct administrative measures, authorities can claim they're following market principles and helping build Chinese companies.
CONSTERNATION
Ping An's announcement was met by consternation in the markets. Previously, China's largest domestic equity sale was the 66.8 billion yuan raised by oil giant PetroChina in its Shanghai initial public offer last October.
Ping An said it would use the money as capital and for acquisitions compatible with its core business. It did not elaborate.
"I don't understand what sort of big acquisitions Ping An needs so much money for," said money market analyst Duan Yunfei at Merchants Bank, a major Chinese bank.
"The domestic equity market cannot easily cope with such a huge fund-raising, and the money market doesn't have enough money to cope with it given the slew of other large offers."
Also at the weekend, China Coal Energy Co, the country's second-biggest coal producer, said it was launching an IPO in Shanghai worth up to $4.5 billion, which would make it China's 10th biggest.
And the securities regulator said it would consider on Wednesday a proposal for a Shanghai IPO by China Railway Construction Corp, one of the biggest construction firms. That could mean another cash call of about $3 billion in Shanghai.
Most analysts do not believe the government is actively pressuring the state-run companies into issuing equity. But it can easily create periods of heavy new share supply by adjusting the timing of regulatory approvals for new issues.
One theory is that firms are rushing to raise funds now since they fear the stock market will slow later this year, as Chinese monetary policy tightens further and the U.S. economy possibly enters recession. If so, regulators seem happy to allow the rush.
"I don't think the government is directly behind these share issues. But it's clear that regulators are no longer trying to limit the supply," said Zheng Weigang at Shanghai Securities.
The timing and mechanics of Ping An's sale are unclear. It described the sale as an "offer", not a private placement which might have have less impact on markets, but analysts think the sale may be adjusted if necessary to limit the impact.
Analysts said the offers by China Coal and China Railway were still likely to attract strong demand, since domestic Chinese IPOs are typically priced attractively to ensure that the stocks enjoy strong debuts.
But Ping An is likely to meet poor demand if it tries to sell as many shares as its announcement suggested, analysts said. Its Shanghai shares plunged their 10 percent daily limit on Monday.
"We're not sure of the regulatory situation behind this slew of major offers, in particular Ping An's record fund-raising," said a senior trader at Guotai Junan Securities.
"But we question the wisdom if authorities want to push share prices down in this way. If investor confidence is destroyed, the market will fall even more than it did in May last year." ($1 = 7.24 yuan) (Editing by Andrew Torchia & Lincoln Feast)