Economy trumps market pressures as China resumes IPOs

* Drugs maker Guilin Sanjin to issue shares on June 29

* Govt confident market can handle IPO resumption

* Govt worried long IPO ban could have hampered economy

SHANGHAI, June 19 - A 26 percent stock market rally since China halted new initial public offerings nine months ago has given regulators confidence to reopen a financing channel crucial to reviving the world's third-biggest economy.

"Investor confidence is back, liquidity is ample, the economy is recovering, so the government should feel confident that the market can handle IPOs now," said Chen Jijun, analyst at Citic Securities Co.

"IPOs would also help the economy by providing much-needed funding to companies," Chen said.

China on Friday gave Guilin Sanjin Pharmaceutical Co approval to raise about 634 million yuan ($93 million) in China's first IPO since last September. More than 30 other companies are queuing up for IPOs and could raise about 105 billion yuan in total, according to analyst estimates.

"An economy with a lot of debt financing, but little equity financing is limp. If a company relies only on bank lending, its balance sheet is unhealthy," said Jerry Lou, Asia strategist at Morgan Stanley. "There's never a best timing for IPO resumption. The earlier, the better."

An IPO resumption could also help to take pressure off a swelling liquidity bubble in China's economy created by a 4 trillion yuan economic stimulus package that has fuelled a surge in lending and investment.

New loans in the first five months exploded to a record 5.84 trillion yuan, exceeding the government's minimum full-year target of 5 trillion yuan.

Excessive liquidity risks fuelling fresh asset price bubbles as stock and property prices jumped. The benchmark Shanghai Composite Index has surged more than 50 percent this year, making it one of the best performers among major world indexes.

"Chinese stocks are already expensive, and the market has well priced in optimism toward an economic recovery," Morgan Stanley's Lou said. "When there's ample liquidity, it's unavoidable for some money to flow back to capital markets for speculation."

Shares of dual-listed Chinese companies are 38 percent more expensive in China than those traded in Hong Kong, compared with a low of 5 percent in the premium last September.

Despite bubbles in some stocks, the government is taking a cautious approach by allowing small companies to go public first, for fear that a sudden flood of new supply of equities in the market might cause a collapse.

"Obviously, the government is using small IPOs to test the water," said Tu Jun, strategist at Shanghai Securities. "Regulators don't want to see the market slump again, so they will control the pace of IPOs to ensure market stability."

Guilin Sanjin Pharmaceutical said on Friday it would issue up to 46 million mainland-listed A shares in Shenzhen on June 29 to raise funds for projects needing 634 million yuan in total investment. Chinese companies raised a record 472 billion yuan in the domestic stock market in 2007.

"The fund-raising size is tiny. It's nothing." said Lou of Morgan Stanley. "The real test to the market is the upcoming IPOs of big companies, such as China State Construction Engineering."