[SHANGHAI] With China's main stock market more than doubling in the past year, authorities are looking to cash in by accelerating flotations, but the state-controlled listing system is riddled with institutional shortcomings, analysts say.
In a legacy of China's decades of Marxist ideology, when the Communist Party launched a stock market 25 years ago - perhaps the ultimate capitalist tool - it kept strict control over key decisions, including initial public offerings (IPOs).
The China Securities Regulatory Commission (CSRC) decides which companies offer shares and when, as well as setting guidelines for the number of shares and their price - all of which are determined by the market in other countries.
It limits IPO prices to a maximum 25 per cent above the average price-to-earnings ratio for listed companies in the same industry, but typically seeks to make them around the same level.
As a result companies cannot take demand into account and must go to the market underpriced, offering those investors lucky enough to buy a guaranteed profit.
Virtually every floated firm surges 44 per cent on its first day of dealings - the maximum allowed for new issues.
The most extreme recent example is Baofeng Technology, which listed in Shenzhen in March and has repeatedly risen by its daily 10 per cent limit, offering a cumulative return of more than 2,300 per cent in only two months.
"If the issue price is 5.0 yuan (S$1.07) then it will go to 50 yuan (S$10.07). It's a sure thing. You'll definitely make money," said Wang Youfu, who works as a barber but trades stock when he is not cutting hair.
"Everyone is trying to buy IPOs but the supply is small." As a result, investors - mostly individuals rather than institutions - drain huge amounts of funds from the rest of the market as they try to subscribe.
But - typically of the country's famed "socialism with Chinese characteristics" - the allocation process is murky, offering rich possibilities for insiders to profit.
"The biggest problem the IPO system faces is that China's market is not mature enough right now," said Shen Zhengyang, an analyst at Northeast Securities.
Even so the prestige of listing and vast profits to be made for employees who already hold shares ensure IPOs are still attractive for the companies themselves.
The system and the current market frenzy mean it is a long way from an efficient market for capital, and IPOs find ready buyers regardless of a firm's quality.
Baofeng Technology itself suffered a net loss in the first quarter this year, highlighting the questionable valuations created.
With growth slowing, incentives for a freer economy are growing stronger while preserving China's unique brand of socialism.
Leaders declared in 2013 that the market would play a more "decisive" role in the world's second largest economy, leaving the IPO rules out of step with the proclaimed new imperative.
In January last year, the regulator ended a 14-month IPO moratorium to help support growth using private investors' funds rather than the debt-addled state banking system.
It has since allowed batches of companies to list but there is a massive backlog of around 500.
The CSRC released proposals last year to "clarify and straighten out the relationship between government and the market", allowing the company, its underwriters and potential investors to determine IPO timing and pricing.
But the challenge will be how it can vet companies to protect investors from fake information and potential fraud, while reducing state interference.
"What kind of role will the CSRC play in the future to meet the demand for both market efficiency and market supervision?" asked Yingda Securities chief economist Li Daxiao.
Even in a market plagued by what regulators call "irregularities," Shanghai-listed venture capital company Boyuan Investment last month made the extraordinary statement that it was unable to stand behind the "truth, accuracy and completeness" of its own annual report. It is now under investigation for fraud.
"Once it becomes a registration system, it will be hard for CSRC to make sure all the materials or balance sheets of the companies are real," said Soochow Securities analyst Ling Xiyang.
But now the IPO tap is gushing, the changes seem to have ground to a halt.
The process, or lack of it, illustrates the difficulties of reforming a system bowing under the cumulative weight of years of inefficiency, and shot through with vested interests benefiting from the current arrangements.
The reform proposals were still only a "rough framework", Mr Ling pointed out. "There is still a long way ahead to be truly market-oriented."