China’s equity rally has clearly run into some trouble in recent weeks. The Shanghai index dropped a further 1 per cent on Wednesday, taking it into negative territory for 2013. Among the plethora of reasons offered for the stumbling run is the overhang of IPOs, and the potential that some of them might come to market soon.

But would a series of new issues really be so bad for the market?

China’s market for IPOs has effectively been on ice for months now, with some concerned that a flood of new shares could sap already fickle investor demand.

Regulators have already taken concrete steps to allay those fears, making it easier to list abroad and repatriate funds raised, and adding a new layer of scrutiny for those already in the queue. They have also tried to drum up more foreign investment.

Meanwhile the market for new listings looks to be slowly heating up in Hong Kong. Galaxy Securities took another step towards its $1.5bn offering when it added a whole new list of banks to arrange its deal. Sinopec Engineering could follow, while decent sized listings from New World and Great Eagle are also in the works. China Everbright is apparently dusting off its old prospectus too.

So it would make some sense that mainland markets might also reopen for IPO business soon. And that needn’t be such a bad thing, says Helen Zhu of Goldman Sachs.

She predicts that around Rmb180bn will be raised this year in mainland IPOs, slightly more than the Rmb150bn forecast by PwC. That equates to an 80 per cent jump from 2012.

Even so, China’s market can easily absorb those new shares through two ways: a minor allocation shift from institutional investors; and through new retail account openings. As these charts show, a combination of the two could be just the ticket:

Goldman’s view is that when it comes to the equity market, it’s best to turn to everyone’s favourite maxim: it’s the economy, stupid:

We have been holding the view that the economic backdrop is the most critical factor driving equity markets, as it will have a fundamental impact on earnings and valuations, and we believe some investors’ pure or significant focus on liquidity itself is not sufficient.

Related reading:
China moves to make its markets credible, FT
China equities on track to go global, FT
Cheap stocks and reform hopes lift China, FT

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