The benchmark Shanghai composite index yesterday rose 2.14 per cent to close at 1,580.58 points.

Air China yesterday announced it would issue 1.639 billion A shares at the offer price of 2.80 yuan (35 US cents) per share, cutting the offer by 39 per cent from up to 2.7 billion shares after a weak subscription from institutional investors.

Institutional investors had subscribed to a combined 469.5 million shares by Monday, leaving 819.5 million shares remaining, with around 50 per cent of the company's total IPO to be sold on-line from today.

Yesterday's market was also encouraged by a possible reform of the rules on setting IPO prices following local media reports. The reports said that the China Securities Regulatory Commission (CSRC) and some leading securities houses held a conference in Northeast China's Harbin to probe problems in the launch of new IPOs since the government lifted its year-long ban on capital-raising in May.

IPO pricing flaws

The market's weak demand for Air China shares somehow exposed flaws in the current IPO pricing rules set by the securities regulator.

Under the current rules, institutional investors can submit a bid for the IPO price without any obligation to buy the shares. Institutional investors usually offered a higher price in the first stage, but only subscribed to a few shares later on.

Analysts noted that Air China's IPO price being too high revealed the flaws of the pricing system.

"The company last week set the price range at between 2.75 yuan (34.4 US cents) and 2.95 yuan (36.9 US cents) per share, but from my view the reasonable price should be between 2.6 yuan (32.5 US cents) to 2.7 yuan (33.8 US cents), considering the bad performance of the airline industry and the relatively excessive supply of new IPOs in the market," said Li Lei, an airline analyst with CITIC China Securities.

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