The market era

Regulator announces major policy shift on IPOs

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06 Dec 2013
Week in China

“A new era in the A-share market has dawned,” exulted the Shanghai Securities News after the announcement that the China Securities Regulatory Commission (CSRC) was lifting a seven-month ban on new listings.

That was in 2009 and as far as dawns go, it was a false one. Investors watched aghast as the benchmark Shanghai Composite index lost 30% over the next three years.

In most parts of the world, IPO volumes serve as an indicator of investor appetite (think of the dotcom boom in the US, when practically any concept with an internet label was guaranteed a chunky debut).

But that’s not been the case in China, where the decision about who lists and at what price is down to the regulator. In recent years the CSRC has pursued an interventionist agenda, hoping that choking off the volume of IPOs will drive up the value of pre-existing stocks. Since the launch of the Shanghai and Shenzhen bourses in the 1990s, the CSRC has imposed at least eight moratoriums on new IPOs and the primary market window has been shut for 33 months since 2005. The latest IPO ban, which began last October, is the lengthiest in the history of the Chinese markets.

But word emerged on Saturday that the ban will end later this month and the CSRC says that as of January, IPOs will be permitted again for the 800 or so companies queued up for listing approval. It will take about a year to clear the logjam, but 50 of the luckier candidates could be ready to go public by the end of next month.

As long as the requisite information is provided, the IPO process doesn’t need to wait for governmental approvals

The other message emanating from the CSRC: its entire approach to IPOs is going to be different. Its new rules, for example, say IPO prices will be set by investor demand. Analysts with HSBC believe the CSRC will now focus its attention on protecting minority shareholders, and ensuring listing candidates provide transparent information.

Other changes include allowing share buybacks for the first time, and a new initiative for issuance of preferred shares.

The CSRC’s plan is for the primary market to migrate away from the current system – which requires that candidates get approvals from regulators to list and then join a queue – to a registration-based method.

Under the US-style system (widely used elsewhere) companies that meet basic requirements including a track record in profitability can register for a listing. As long as they provide the requisite information, the IPO process doesn’t need to wait for governmental approvals. Under this proposed regime, the CSRC will concentrate its firepower less on deciding whether firms are fit to list, and more on upholding the integrity of IPO disclosure documents (and imposing harsh penalties for those found guilty of fraudulent offerings).

Also gone: the rule that prevents a listing candidate from valuing its stock at an earnings multiple 25% higher than the peer average. In effect the CSRC is set to relinquish some of its veto power on both the supply of new listings and their valuations, a process that has generally favoured large state firms in the past and which has proved prone to corruption.

“The market, which means sponsors [i.e. investment banks], intermediaries and investors, would be left to do the rest,” the China Securities Journal suggests.

In the short term, retail investors may not be enthused by the CSRC’s new approach. They generally dislike the idea of too much new supply flooding the market. Another worry is that the new rules on preferred shares could see the state banks recapitalise themselves with vast issues of the new stock class (see WiC215 for our previous report on this topic).

Nevertheless, the IPO breakthrough is good news for the investment banks – which should see a boost to fees. China’s biggest brokerage Citic Securities saw its own stock surge to a record high in Hong Kong this week.

But after a number of past disappointments, sceptics wonder whether the CSRC is truly willing to take more of a back seat role. 21CN Business Herald says that this will be a “transitional period” at best rather than a ‘big bang’, noting that securities laws can only be changed during the annual legislative session next spring. The China Economic Times hazarded a more optimistic tone. “Let’s hope investors have seen the last moratorium on new IPOs,” it said.

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