airchina_150.jpgAir China has had to heavily cut the size ($) of its IPO on the Shanghai exchange because of lacklustre demand, says the Financial Times.

Such
a high-profile flop so soon after re-opening the IPO market could
oblige China's regulator to push back the launch dates for the flood of
other domestic IPO candidates waiting on the apron — although a
spokesman says it will not.

Most
interest centres on China Mobile, the world's largest mobile phone
company by subscribers. Like Air China, its shares are also quoted on
the Hong Kong exchange, where they recently gained on talk it will soon issue shares on the mainland.

China
Mobile is waiting for regulatory approval for a planned domestic
listing, so the cold shower that investors have poured on Air China's
prospects could not have come at a worse time.

According to the FT,
Air China has cut the number of shares to be sold by 39% and the share
price has also been reduced to 2.8 yuan, towards the lower end of the
expected range. The IPO will raise 4.6bn yuan.

China has only
recently re-opened its domestic IPO market after a year-long ban. Bank
of China was the first big name to test the waters at the end of May
and its IPO was a great success despite widespread concerns about the
quality of lending in China's banking sector — see earlier EngagingChina story.

However,
this week's muted reception for Air China suggests investors are now
suffering from indigestion after a rush of China flotations in the past
couple of months. In addition, airlines are hardly flavour of the month
because of soaring fuel costs.

The flood of domestic flotations
is the most visible aspect of the liberalisation of China's domestic
equities market. In particular, the regulator wants Chinese companies
that have a Hong Kong listing — so-called Red Chips — to also list on
the mainland.

Institutional investors have traditionally
favoured the HK-listed shares of Chinese companies — so-called “H”
shares — over shares quoted on China's domestic markets. So, to
attract interest for its domestic IPO, Bank of China priced the new
Shanghai-listed “A” shares at a 10% discount to the H shares.

Air China tried to offer its A shares at a smaller discount, but has ultimately had to accept a similar level.

The
A-share markets on Shanghai and Shenzhen stock exchanges are open to
domestic investors and the growing number of qualified foreign
institutional investors — see this EngagingChina story for more on QFII.

To
add to the confusion, China's domestic markets also offer B shares,
which are denominated in US dollars and were originally the only share
class available to foreign investors. The B shares have become
marginalised in recent years and the A-share and B-share markets may merge, according to the China Daily.

Air
China originally hoped to raise 8bn yuan from its domestic A-share
listing to finance the purchase of 45 aircraft and its airport
expansion project in Beijing.

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