China stocks face $722b overhang as share lockups end

Bloomberg

More than $722 billion worth of Chinese stocks will be unlocked for sale next year, testing a market where valuations are at a five-year high.
That would be the largest amount since at least 2011, according to China Merchants Securities Co. It’s also equivalent to about 7% of the value of the entire Chinese equity market, data compiled by Bloomberg show.
From initial public offerings to additional placements, China’s cash-hungry companies have been encouraged by Beijing to raise funds by selling new shares.
There has also been a rush of additional sales by firms looking to avoid the turmoil in the nation’s debt market.
As a result, the number of restricted shares held by major shareholders, senior executives and early investors is swelling, driven by Beijing’s market reforms and looser regulations.
Three companies saw their stocks fall on Wednesday after announcing equity sale plans by holders. Shanghai’s Star market, which is set to see high volume of new stock unlocks next year, led declines in Chinese equities.
A gauge tracking it closed down 2.4% to the lowest in more than six weeks.
“More companies are going to issue shares to raise funds, especially after the rising default problems in the credit market,” said Capital Securities Corp analyst Amy Lin.
“That means more restricted shares being unlocked in the future, which will be an issue affecting the market for a long time.”
In China, restricted stocks usually have a lockup period of anything between six months and three years after the date of listing.
And when unleashed for company insiders to sell, the rest of the market can feel the impact.
A gauge tracking the Star market fell 8.2% in the three trading days after its one-year anniversary in July, when company insiders took their first chance to sell. That dragged the country’s benchmark CSI 300 Index down by 4% during the same period.
Next year will see a concentration of unlocks in the second and third quarters, according to a recent Industrial Securities Co research note. Companies in electronics, medicine and biotechnology, and brokerage industries face the highest value of unlocks next year, according to China International Capital Corp, which said in a note that it expects a large amount of shares freed up on the main board in June and on the Star board in July.
Chinese companies have raised 438 billion yuan ($67 billion) from A-share IPOs this year, the highest level since 2010, according to Bloomberg-compiled data. This year the volume of private share placements hit the highest level since 2017.