IPOs flood China's stock market

Bank of Communications Chairman Jiang Chaoliang hits the gong to begin trading of the bank's shares during its IPO at the Shanghai Stock Exchange on May 15.

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KAI RYSSDAL: Fundamentally, what Chinese stock markets have is a supply-and-demand problem. Much as the U.S. dot-com boom brought new companies and their initial stock offerings with frightening regularity, that's what China's like right now. All those extra shares looking for buyers.

With the Shanghai Composite Index defying gravity on a regular basis, entrepreneurs and established businesses are afraid of missing out on the good times. Four big companies will start selling shares next week. But it's not at all clear that's what China's overheated stock markets really need.

Marketplace's Alisa Roth tells us more.


Alisa Roth: Chinese stocks fell sharply today. But the market is still blazing. IPOs of Chinese companies are on track to raise more than $52 billion this year. That's more IPO money than anywhere else in the world.

Warren Bailey teaches finance at Cornell University's business school. He says everyone's rushing to get their shares on the market while it's still hot.

Warren Bailey: Even if a particular issuer generally believes that their company has value, well, it's better to sell an additional fraction of your company for a high price than a low price, even if you aren't trying to pick the market's pocket.

Prices are high in China, in part, because there's so much more demand for stocks than there are shares to buy. Some people say this IPO bonanza could put too many shares on the market.

But the Rand Corporation's William Overholt sees another danger.

William Overholt: The bigger risk is that the Chinese market would crash because irrational exuberance is getting to be at a rather high level and that would put a damper on Chinese stocks everywhere.

What would that do to the world's economy?

Overholt: The Chinese stock market isn't all that connected to the rest of the world at this point, so any impact is psychological.

Still, that can create quite a stir. Earlier this year, stock markets around the world dropped drastically after the Chinese market had its largest fall in a decade.

In New York, I'm Alia Roth for Marketplace.

Ryssdal: Cautious investors out there might appreciate knowing the Shanghai Composite dropped 5.2 percent overnight. That's the biggest drop since the 8 percent plunge back in February. But unlike five months ago, Wall Street today didn't even bat an eye.

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