China trust pulls IPO, blaming market conditions

Welkin China Private Equity will return money to investors.

An investment trust that would have bought shares in private Chinese companies has pulled its initial public offering (IPO) due to “increased levels of macroeconomic uncertainty and market volatility”.

Welkin China Private Equity (WCPE), which announced its intention to float in early September, said its IPO was now “on pause” and investors’ money would be returned.

Welkin said in a statement: “The WCPE board and the company’s investment manager, Welkin Capital Management (Asia) Limited, have been greatly encouraged by the positive response to the investment proposition and the significant level of investor interest and would like to thank investors for their support. In light of the feedback received, the WCPE Board will reassess an IPO at a later date once macroeconomic conditions have improved.”

Chinese shares are having a torrid year, trading at a 13-year low as a result of the growing concentration of power in the hands of Chinese Communist Party (CCP) leader Xi Jinping and his increasingly heavy-handed interventions in markets and the economy.

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The Hang Seng index (HSI), which tracks the largest companies listed in Hong Kong, today is worth 15,180 points, similar to January 2009 in the aftermath of the financial crisis. It bottomed out at about 12,000 points in March 2009.

Its 35% crash this year means that investors have lost nearly half their capital value over the past five years.

The Shanghai Stock Exchange Composite index, which owns more domestic Chinese companies, has fallen 18% this year, while the Nasdaq Golden Dragon index, which owns Chinese firms listed in the US, has fallen 40% this year.

The reason for the renewed selling is that President Xi has further established control of the Communist Party after he had his predecessor Hu Jintao publicly escorted from the Communist Party Congress last weekend.

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This has spooked investors, who are worried that strict zero-Covid policies endorsed by Xi will continue at the cost of economic growth, and intervention in publicly listed companies, such as technology giants Alibaba (NYSE:BABA) and Tencent (SEHK:700), as well as the education and gaming sector, will carry on at the cost of shareholder returns.

Nevertheless, when marketing the trust to investors Welkin said the proposed IPO came at a good time as it could take advantage of “the valuation reset in Chinese companies” following the sell-off in the country’s listed and unlisted firms.

While WCPE would have been the first trust to invest exclusively in private Chinese stocks, other trusts do have some exposure to the unlisted market in China.

For example, Baillie Gifford China Growth Trust can invest up to 20% of its portfolio in unlisted shares, and Super 60-rated Fidelity China Special Situations can invest up to 15% there.