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China slow, steady move to US-style IPOs a boon for local brokers

HONG KONG] China's landmark decision this month to implement a US-style registration system for stock listings will boost revenues at local banks and brokers and lure more companies to the stock market, analysts said.

Under official proposals unveiled by the State Council on Dec 9, issuers and underwriters will have leeway to choose the pricing and timing of initial public offerings (IPOs), decisions currently made by the regulator.

Investors will also no longer be required to set money aside in an escrow account ahead of listings.

The new system, to be approved by the National People's Congress later this month, will take up to two years to be implemented, a time frame that analysts said was longer than initially expected but that would ensure a smooth transition.

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"It's going to make the whole IPO process a lot smoother because you don't have to wait for the approval," said Paul Lau, partner and head of the capital markets advisory group at KPMG China.

"It'll be more focused on financial disclosure and compliance with listing requirements and let the market decide when the IPO should happen." Nearly 690 companies have filed to go public in China and were waiting for approval for IPOs, the latest regulatory filings showed, more than the sum of all new listings in China between 2011 and 2014.

The move will eventually unblock such backlogs, boosting annualized profits at Chinese securities firm by 5.3 billion yuan (S$1.16 billion), according to estimates from broker GF Securities.

Analysts at Daiwa Capital Markets and BOCOM International said domestic players such as GF Securities and Huatai Securities would be likely winners from the easier IPO regulations because of their focus on medium- and small-sized issuers.

Large brokers such as Haitong Securities would also benefit due to their sizeable investment banking businesses and balance sheets.

Hong Kong will also indirectly gain as Chinese companies are expected to continue to do secondary listings on its stock exchange to access international capital, analysts said.

Chinese IPOs were on track to raise the second-largest amount of funds ever this year when the China Securities Regulatory Commission (CSRC) suspended listing approvals in mid-June amid a stock market rout.

New listings totaled US$24.7 billion so far this year, with US$1.3 billion trickling in since late November when the approval of deals resumed, Thomson Reuters data show. Companies raised US$13.2 billion in Chinese IPOs in 2014.

Broker Everbright Securities leads the IPO league table in China, which is dominated by local firms such as Citic Securities, Ping An Securities and Guosen Securities.

Brokers had initially expected the changes to the IPO system to come into effect by the first half of next year, but even if the rules are approved this month, they would still have to be put under public consultation, taking as long as 12 months before they are implemented, Daiwa Securities said in a note.

Jonathan Ha, chief executive of Shanghai-based markets research firm Red Pulse, said the timeline would benefit companies in the long-term. "The two year timeline...was indeed a bit of a disappointment," he said. "That being said, the fact that the process will take longer does demonstrate that policy makers seek to ensure a smooth transition, and that all testing is done thoroughly prior to launch. Slowly but surely."