Why China’s $58 billion IPO boom doesn’t mean smooth sailing ahead

Since the US-China trade war began, China has tried to reduce its dependence on US financial markets and provide a path for Chinese firms to fundraise at home.

In doing so, China’s initial public offering (IPO) market surged. This year, it far outpaced traditional IPO hubs in the US, Hong Kong, and Europe in terms of proceeds raised.

As of August, IPOs on Chinese stock exchanges raised nearly $58 billiona record high for such a period, according to Bloomberg data. From January to August this year, IPOs in China raised nearly three times as much as listings in the US raised, according to market tracking platform Dealogic.

In the first six months of 2022, the Shanghai and Shenzhen stock exchanges accounted for almost half of the worlds IPO proceeds, according to KPMG.

State-owned giants returning home from Wall Street and companies involved in strategic sectors that Beijing wants to lead inlike semiconductors, renewable energy, and biotechnologydominated Chinas listings this year.

Yet Chinas sizzling IPO market doesn’t necessarily translate into good news for the countrys economy. The positive investor sentiment that helped the recent mainland IPO boom could soon start to dwindle, as China continues to adhere to its rigid zero-COVID policydespite the economic consequencesand grapples with a major economic slowdown and deepening real estate crisis.

Homegrown market

The US and China are currently embroiled in a decades-long audit dispute that has intensified in recent months. Beijing hasnt yet given the green light for US-listed Chinese firms to allow American access to their books and auditors. As a result, over 260 companies worth $1.3 trillion are at risk of being booted from American stock exchanges by 2024 if they dont comply with US listing rules.

Meanwhile, Chinese companies seeking new listings have avoided American stock exchanges in the past 12 months and instead considered mainland and Hong Kong bourses, Louis Lau, partner in the capital markets group at consultancy KPMG China, told Fortune.

The public listings of state-owned giants gave the mainlands IPO market a big boost this year, Michael Wu, senior equity analyst at financial services firm Morningstar, told Fortune. Chinas two biggest IPOs of 2022 to date are from state oil behemoth CNOOC and state telecom firm China Mobile, which raised $5 billion and $8.6 billion in Shanghai, respectively. Both firms were kicked off the New York Stock Exchange last year after the US government designated them as having ties to Chinas military-industrial complex. Chinese investors sought a safe haven in traditional and mature sectors like energy and telecommunications, Lau says.

Chinese monetary policy also helped. Rising interest rates among other tightening measures have hampered corporate fundraising in global markets. Chinas relatively accommodating policies, compared to the Feds moves, have supported capital raising and financing activities in the country, Wu says.

slow down

Chinas public listings in 2022 have been successful in that theyve raised money on domestic markets without completely tanking prices, Thomas Gatley, senior analyst at Gavekal, a China-focused research firm, told Fortune. Shares of Chinese IPOs are up on average 43% versus their listing price, while Hong Konglisted stocks have plummeted 13% since listing, according to Bloomberg data.

But there are limits to this strategy, he says.

Beijing’s policies this year, which included injecting tens of billions to boost businesses and consumer spending to help its COVID-battered economy, lifted investor sentiment. The markets rode some of that buoyancy to rally, he says, but a growing real estate crisis in China spell trouble because it threatens to upend the economy as Chinese homeowners refuse to pay mortgages and distressed property developers fail to repay bank loans.

Theproperty crisis comes alongside several key problems ahead of the Chinese Communist Partys all-important annual meeting in October. At the gathering, Xi Jinping is expected to cement his third term as the nations president.

COVID continues to spread, but the state has reiterated its zero tolerance for casesdespite any economic consequences. China’s youth unemployment rate has surged to record highs of nearly 20%. And the International Monetary Fund recently downgraded Chinas 2022 and 2023 GDP estimates by 1.1% to 3.3% and 4.6%, respectively, owing to the countrys lockdowns and escalating property chaos.

Its hard to recall a time when economic growth is so poor, and unemployment growth so weak ahead of Beijings October meeting, investment bank Jefferies wrote in a Monday note.