HONGKONG (Reuters Breakingviews) – China would be wise to avoid cornerstone investors taking too much of the burden. Tech stars like Alibaba may be encouraged to sell stocks to bolster home prices, and Foxconn has just done something similar for its IPO in Shanghai. This practice can prevent fluctuations in the stock markets, but also distort the markets.
In Hong Kong, it is common to find investors to secure new deals for Beijing. The phenomenon came after the financial crisis in Asia in 1997, when well-heeled magnates and sovereign wealth funds helped to do business. Selling a large chunk of stock before going public reduces the risk to issuers and underwriters. Restricting shoppers to selling their stock for six months or more may also reduce volatility in already volatile markets.
For this reason, the strategy for China makes sense as it seeks to bring home large overseas technology companies. Mom-and-pop investors have a habit of unloading their large-scale allocations on a whim. Keeping a portion of a huge new allotment with cornerstone investors and keeping the stock for a while should keep things in check. Foxconn is testing the idea with a $ 4.3 billion IPO of a subsidiary. 20 investors – including Alibaba, Tencent and Baidu – were placed at around 30 percent, with a vesting period of three years.
However, it is easy to overdo it. In challenging markets, Chinese issuers in Hong Kong have called on state-owned companies and other companies to subscribe for up to 80 percent of a bid. This undermines the listing process by reducing the influence of professional fund managers and day-to-day investors. China's Postal Savings Bank, for example, sold more than $ 7 billion in shares at book value in 2016 as peers traded at lower valuations.
These agreements can also over-pressure companies on public markets. The men's outfitter China Outfitters tried to start an IPO in 2011 and failed later with cornerstones. The stock is now trading at 15 percent of its original price.
Chinese markets are already affected by corporate governance issues. Stocks can also be stopped for months. It would be a mistake to add another level of market perversion by relying too much on cornerstones.
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