For years, Shanghai has been the undisputed king of China’s equity markets, vitalized by a steady stream of initial public offerings from the country’s biggest and best state-owned enterprises.
But this year Shanghai has been outgunned by Shenzhen, its less glamorous rival in the south of China, because of an extraordinary boom there in IPOs by smaller, private companies.
The Shenzhen Stock Exchange has seen 246 companies raise a record $33.6 billion by listings this year, triple last year's total and much more than the $24.1 billion raised in Shanghai.
“This tells us something of epic proportions about China,” says Peter Fuhrman, chairman of China First Capital, a boutique investment bank in Shenzhen.
Most of the companies listing in Shenzhen are small and medium-sized groups owned by private entrepreneurs, as opposed to the state-owned behemoths that typically gravitate to Shanghai.
“Chinese policymakers have seen the central importance to the country’s future of allowing private companies greater access to private flows of equity capital,” says Mr Fuhrman.
The China Securities Regulatory Commission, which controls stock market listings in the country, appears to have sharply accelerated approvals of IPOs in Shenzhen this year. Market participants say the CSRC has also become less involved in decisions about size, timing and pricing of share sales.
Shenzhen’s IPO boom represents a substantial fresh source of capital for smaller private companies, which have typically been starved of funds by a state-owned banking system that has preferred to lend to other organs of the government.
The bourse is also an increasingly attractive place for private equity groups to make lucrative exits from their investments in China.
Goldman Sachs made a near 200-fold profit on its original $5m investment in Hepalink, when the drugmaker listed in Shenzhen in April.
Shenzhen is still a relatively small part of China’s financial system – the 220 billion yuan ($33 billion) raised by IPOs there this year is dwarfed by the 6,000 billion yuan-plus in new loans that Chinese banks have extended during the same period.
But the IPO bonanza represents an important step in the evolution of China’s financial markets.
It was only last year that Shenzhen launched ChiNext, a specialised exchange for start-up companies – and already 91 companies have raised a combined $11bn there since January.
Investment banks are taking note. Fees for IPOs in Shenzhen are on average 4.4 percent of the amount raised — almost double the 2.4 per cent charged for deals in Shanghai, Dealogic says.
As a result, the Shenzhen boom has been fantastic for China’s domestic investment banking industry, especially the smaller players, says Fraser Howie, author of Privatizing China, a history of the country’s stock markets. But foreign investment banks have missed out, having hitherto focused on an “elephant hunt” for big SOEs.
“At the moment the elephants have all been frightened away and you’re shooting monkeys out of trees,” says Mr Howie.
The top 10 banks that arrange IPOs in Shenzhen are all Chinese. Only three foreign banks – CLSA, DeutscheBank and Credit Suisse – register in the top 50, according to Dealogic rankings of market share.
"What is certainly out there in abundance – and what’s desperate for capital – is the private and quasi-private sector."
Thomas Deng, head of China equity capital markets at Goldman Sachs, says the bank has been dedicating more resources to win business from small companies looking to list in Shenzhen. “Most of the large SOEs have been privatised and with the economy’s fast growth some of the small companies today could become big companies five years [from now],” he says.
Whether foreign banks manage to get in on the action or not, the Shenzhen gold rush shows no signs of stopping.
Chinese investors, who are restricted from investing abroad, remain hungry for fast-growing domestic companies – even at valuations double the average in foreign markets.
Some analysts doubt whether many of the companies flocking to raise money in Shenzhen will live up to current growth expectations in the long term, let alone become national or global champions. But few doubt their ability to raise capital at the moment, with China’s financial system awash with liquidity.
“What is certainly out there in abundance – and what’s desperate for capital – is the private and quasi-private sector,” says Mr Howie. “Their time has come.”