World Markets

Asia markets: China opens the IPO floodgate

Just as initial public offerings cool down in the United States, China's IPO market is picking up.

An investor observes stock market at a stock exchange hall in Beijing.
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Investor confidence may slowly be building in Chinese equity markets, after a hugely volatile year. When the current week is over, 10 new publicly traded companies will have joined the markets in Asia's biggest economy.

"Chinese stock markets have been relatively calm in recent weeks, and as a result, the government has started to lift some of the restrictions introduced during the depth of the equity market collapse, including the freeze on IPOs and a ban on share sales," said Chang Liu, China economist at Capital Economics.

Some of the companies going public this week include Jiangxi Fushine Pharmaceutical, Shenyang Toly Bread, Shenzhen Qixin Construction, Chungsin Technology Group and Henan Thinker Automatic Equipment, among others.

According to Renaissance Capital's chairman, Kathleen Smith, the largest of this recent batch of approvals is Henan Thinker Automatic, which hopes to raise $208 million. The rest are small IPOs, below $100 million.

China's economy in 2016
China's economy in 2016

"These deals will be of interest to investors because of the built-in gain resulting from the current securities regulations that require that IPOs be priced at attractive valuations. However, there may be less interest among non-Chinese investors who have access to A-share IPOs because of increasing cautiousness about the Chinese economy," noted Smith.

The reopening of the Chinese IPO market comes as regulators are expected to gradually shift to an offering registration system that's more similar to the U.S. approach. Having stocks in China collapse this year, Beijing is attempting to rebuild confidence in its IPOs and its equity markets in general.

"Continuing IPO reform is a signal by the government of commitment to financial reform amidst a turbulent market," William McFadden, head of China macro sales at investment bank North Square Blue Oak, said in a note to clients on Tuesday.

While Andy Liu, senior vice president at risk analysis firm Teneo Intelligence, told CNBC that "I think that [the] IPO resumption is a vote of confidence from the government."

But none of that means that Western investors are suddenly bullish on China's markets or economy in general.

"I don't see the resumption of IPOs, specifically the 10 this week, signaling an improvement in investor sentiment or a reason to buy Chinese stocks," said Alex Wolf, emerging markets economist at Standard Life Investments, which has $379.5 billion in assets under management.

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Wolf said the Chinese economy and market will continue to be driven by economic and corporate data, and while things may be stabilizing in the country, earnings are likely to remain weak. He also expects "lackluster investor demand" for IPOs given the large number of shares expected from a big backlog of companies that had put their public offerings on hold.

"Market confidence has been badly damaged by the equity debacle this summer and we think the chances of sustained increases in Chinese stocks over the medium term are still slim," said Capital Economics' Chang Liu.

Two big factors that could affect sentiment around China include the Federal Reserve's decision to raise interest rates — due Wednesday afternoon — and recent Chinese central bank moves to loosen its currency peg to the dollar. Currency concerns could keep investors away.

Last week the Chinese yuan posted its biggest weekly drop against the dollar in a decade, hitting a fresh, 4 ½-year low.